It is now December 31, 2011 (n=0), and a judge just found in favor of a woman wh
ID: 2735827 • Letter: I
Question
It is now December 31, 2011 (n=0), and a judge just found in favor of a woman who sued the city council for injuries sustained in a January 2010 accident. She requested recovery of lost wages plus $100,000 for pain and suffering $20,000 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 judge decided that she would have work for another 3 years. She was scheduled to have earned $34,000 in 2010. (Assume that the entire annual salary amount would have been received on December 31, 2010). Her employer testified that she would probably received raises 5 percent per year. The actual payment will be made on December 31, 2012. The judge stipulated that all dollar amounts are to be adjusted to a present value basis on December 31, 2012, using a 7% annual interest rate and using compound, not simple interest. Furthermore, he stipulated that the pain and suffering and legal expenses should be based on December 31, 2011, date. How large a check must the city write on December 31, 2012?
Explanation / Answer
Pain and suffering cost in dec 2011= 100,000 + 20,000 = 120,000
The present value of legal expenses in dec 2012 = 120,000*1.07 = 128.400
She is 62 in december 2011 (for caclualtion let us take in as Jan 2012), So her age in Jan 2010, when the accident happend = 60 years. So she gets her salary until she is 65.
Salary in 2010 = 34,000
Salary in 2011 = 34,000*1.05 = 35,700
Salary in 2012 = 35,700*1.05 = 37,485
Salary in 2013 = 37,485*1.05 = 39,359.25
Salary in 2014 =39,359.25*1.05 = 41,327.21
Present value of these in December 2012 at 7% rate = 34000*1.07^2 + 35,700*1.07 + 37,485 + 39.359.25/1.07 + 41,327.21/1.07^2 = 173,427.53
Total amount = 128,400 + 173,427.53 = 301,827.53
The check amount is $301,827.53
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