Question

You are in a car accident, and you receive an insurance settlement of $5,000 per year for the next 3 years. The first payment is to be received today. The second payment is to be received one year from today, and the third payment 2 years from today. If the interest rate is 6%, the present value of the insurance settlement is:

Answer 1

Answer:

Explanation:

Present value is found by discounting future values using a discount/interest rate.

Current year PV of $5000 is $5000.

A year in future PV is $5000/(1+r)^n which is $5000/(1.06)^1

= $4,716.98 is what $5000 in a year from now is worth.

Two years in future is $5000/(1+r)^r which will now be $5000/(1.06)^2

= $4,449.98 is what $5000 two years from now is worth today.

Add all figures up to get your Present value.

=5000 + 4,716.98 + 4,449.98

= $14,166.96 is the present value.