Question

It is now December 31, 2015 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2014 accident. She requested recovery of lost wages plus $600,000 for pain and suffering plus $120,000 for legal expenses. Her doctor testified that she has been unable to work since the accident and that she will not be able to work in the future. She is now 62, and the jury decided that she would have worked for another three years. She was scheduled to have earned $37,000 in 2014. (To simplify this problem, assume that the entire annual salary amount would have been received on December 31, 2014.) Her employer testified that she probably would have received raises of 3% per year. The actual payment for the jury award will be made on December 31, 2016. The judge stipulated that all dollar amounts are to be adjusted to a present value basis on December 31, 2016, using a 8% annual interest rate and using compound, not simple, interest. Furthermore, he stipulated that the pain and suffering and legal expenses should be based on a December, 31, 2015, date. How large a check must the city write on December 31, 2016? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

There are three types of payments that City will have to pay to the appellant: (1.) Lost Wages (2.) Pain and Suffering expenses (3.) Legal expenses

Since actual payment will have to be made on December 31, 2016, value of all the above expenses have to be calculated as on 31st December, 2016 using interest/discount rate of 8%. Let's calculate value of three types of payments one-by-one:

(1.) Lost wages: The woman got injured in January 2014 and therefore couldn't earn anything for 2014 & 2015.Further, as per the jury, woman would have worked for another 3 years i.e. 2016, 2017 & 2018. So, let's find out the lost wages of these 5 years considering 3% raise and 8% interest/discount:

Expenses ($)	2014	2015	2016	2017	2018
Lost Wages (considering 3% hike)	37000	37000*(1.03)	37000(1.03^2)	(37000*1.03^3)	(37000*1.03^4)
Actual	37000	38110	39253	40431	41644
Value of lost wages in December 2016	37000*((1.08)^2)	38110*(1.08)	39253	40431/(1.08)	41644/((1.08)^2)
Total Value of lots wages in 2016			196708

(2.) Pain & Suffering and Legal Payments: As judge has stipulated that pain & suffering and legal expenses are to based on December 2015, value of these expenses to be paid on December 2016 is as under:

Expense ($)	2015	2016
Pain & Suffering	600000	600000*(1.08)
Legal	120000	120000*(1.08)
Total		777600

So, total value of check that city will have to write on December 31st, 2016 is sum of all these costs and is: $196708 + $777600= $974708