You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided in favor of the plaintiff. You are the foreperson of the jury and propose that the jury give the plaintiff an award to cover the following:
(a)
The present value of two years’ back pay. The plaintiff’s annual salary for the last two years would have been $53,000 and $56,000, respectively.
(b)
The present value of five years’ future salary. You assume the salary will be $61,000 per year.
(c) $185,000 for pain and suffering.
(d)
$30,000 for court costs.
Assume the salary payments are equal amounts paid at the end of each month. If the interest rate you choose is an EAR of 8 percent, what is the size of the settlement?
1 answer
I get that we are actually getting the future value of the 2 years of back pay and the present value of the 5 years of future pay (as an annuity), plus the P&S and court fees added on as a lump sum. What is throwing me off I think is that the question specifically states the EAR. Would you just divide this by 12 because the question states that the salary are equal monthly payments? Or do you need to do something else to get the rate you would actually use in the question?
1 answer