The insurance settlement pays you $50,000 in one year, growing at 6$ per year for a...

The insurance settlement pays you $50,000 in one year, growing at 6$ per year for a total of 10 years.

a. The discount rate is 4%

b. What is the value today?

Solutions

Expert Solution

Insurance settlement pays $50,000 in one year, growing at 6% per year for a total of 10 years.

Discount rate = 4%

Cash flow in year 1 = $50,000

Cash flow in year 2 = (1.06)¹*50000 = $53,000

Similarly Cashflow in year 10 = (1.06)⁹*50000 = $ 84473.95

Cash flow in year n can be calculated using (1.06)^n-1*50000

Below are the Cashflows in years 1-10 :

Year	1	2	3	4	5	6	7	8	9	10
Cash flow	50000	(1.06)¹*50000	(1.06)²*50000	(1.06)³*50000	(1.06)⁴*50000	(1.06)⁵*50000	(1.06)⁶*50000	(1.06)⁷*50000	(1.06)⁸*50000	(1.06)⁹*50000

Present value of a cash flow C(n) in year n and discount rate r is calculated using the below formula:

Total present value is the sum of the present value of all future cash-flows.

Total Present value of Cash flow C(n) in year n is calculated using the below formula:

PV = 48076.92 + 49001.48 + 49943.82 + 50904.27 + 51883.2 + 52880.96+ 53897.9 + 54934.4 + 55990.83 + 57067.57 = 524581.34

Answer -> $52,4581.34

jeff jeffy answered 1 year ago

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