Question

Paul was injured in an accident. In addition to considerable discomfort, the best estimate is that his medical expense in 2009 will be $100,000. In the future, those expenses will increase at 10% per year. Paul had been earning $50,000 per year, but will only earn 80% of that in the future. Labor economists expect those in Paul's occupation to experience a 3% annual increase in earnings. Assume Paul has a 10-year work life and a 20-year expected natural life remaining. Also assume that the appropriate discount rate is 5%. How much should Paul be awarded? (Ignore tax considerations.)

Answer 1

ANSWER:

Compensation for medical expenses :

The expenses begin at $100,000 and increase at a rate of 10% per year and since he has the expected life of 20 years, we will take the PV of his future medical costs for the next 20 years. The calculations for which are given below :

The sum of the PV of the medical expenses is = $3071047.954 or $3.07 million

Compensation for forgone income:

He would have earned $50,000 per year which would increase at 3% per year but now due to his injury he will only earn 80% of his income.

Thus the calculations for the present value of his forgone income for his next 10 years will be:

Thus the total compensation for forgone income = $87475.96

Therefor Paul must be awarded $3,158,523.91.