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?

Question

Business

Brynn Yates

2 January, 04:18

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?

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Answers (1)

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Heidy · Answer 1

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