A business has been involved in a lawsuit that they have lost in court. The judg

Question

A business has been involved in a lawsuit that they have lost in court. The judge has ordered money to be put in escrow during the appeal. This is to guarantee that the plaintiff will be able to receive the judgement, if the company loses its appeal. The plaintiff has been awarded quarterly payments in the amount of $18,000.00 for 17 years. It was agreed by the judge and both parties that an estimated time for the the appeals process will last 4 years. If money is worth 2.8%, compounded quarterly. How much did the judge order the company to put into the annuity today at the start of the appeal process? (Round to 2 decimal places.)

Explanation / Answer

The amount to put into the annuity today is the present value of cash flows. There are two period in calculation of present value -(i) Present value of quarterly payments for 17 years and (ii) Present value of amount calculated in (i) because payments to be started after 4 years from now. Step-1:Present value of quarterly payments Present Value of quarterly payments = Quarterly payments x Present value of annuity of 1 = $     18,000.00 x 53.95792 = $ 9,71,242.57 Working: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.007)^-68)/0.007 i 2.8%/4 = 0.007 =          53.95792 n 17*4 = 68 Step-2:Present Value of amount calculated in Step-1 Present Value = Present Value calculated in Step-1 x Present Value of 1 = $ 9,71,242.57 x 0.894393 = $ 8,68,672.71 Working: Where, Present value of 1 = (1+i)^-n n 4*4 = 16 = (1+0.007)^-16 =          0.894393 Thus, amount to put into annuity today is $ 8,68,672.71

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.