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You just settled an insurance claim. The settlement calls for increasing payments over a five-year period. The first payment will be paid one year from now in the amount of $7,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

Respuesta :

facundobuzzetti

Answer:

Present Value= $26,535.51

Explanation:

Giving the following information:

The settlement calls for increasing payments over five years. The first payment will be paid one year from now in the amount of $7,000. The following payments will increase by 3.5 percent annually.

To calculate the present value, first, we need to calculate the final value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual payment= 7,000

i= 6.5 + 3.5= 10%

n=5

FV= {7,000*[(1.10^5)-1]} / 0.10= $42,735.7

Now, we can calculate the present value:

PV= FV/(1+i)^n

PV= 42,735.7/1.10^5=$26,535.51