You are the fore person of a jury charged with determining the amount of damages to pay to a plaintiff who was injured at work due to her employer’s negligence. Because of her injuries, she lost the previous two years’ salaries ($3,000 per month for the first year and $3,200 per month for the most recent year) and is expected to lose $3,500 per month for the next five years after today.

a. What is the amount of the award you would recommend she receive if the interest rate used to determine the award is 9.0%, compounded monthly? Please calculate today’s value even if she won’t get paid until the trial is over.

b. What is the amount of the award you would recommend she receive today if the interest rate used to determine the award is 5.72%, compounded weekly (assume four weeks per month)?

a) $246735.45

Explanation:

Given: She lost the previous two years salaries the first previous year she lost $3000

             The most recent previous year she lost $3200

          Now in the future she is expected to lose $3500 in the next 5 years so this scenario has two parts in it a past what she lost before the trial and what she will lose which is the potential after the trial.

(a)Firstly we are given 9% compounded monthly so r will be equal to 9%/12.

Now we will deal with the past loss of the injured individual so for the past two years we use the future value annuity due because the value of the amount to be received today is made at the beginning of each month which is a salary, so

FvDue = P [((1+r) ^n -1)/r] (1+r)

Where FvDue = is the amount that will be due to her when she wins the case.

P is the salary payments missed which is $3000 and $3200 respectively.

r i+s the rate of return on periodically which here is 9%/12=  as the interest is  

Compounded monthly.

n is the number of payments of the salaries missed due to injury which is 12 payments for $3000 and 12 payments for $3200.

For $3000 we substitute on the above mentioned formula:

FvDue = $3000 [((1+ (9%/12)) ^12 -1)/ (9%/12)] (1+ (9%/12)) compute on a calculator

          = $37804.18

For $3200 we substitute on the above mentioned formula with a different salary payment:  

FvDue =$3200[((1+ (9%/12)) ^12 – 1)/ (9%/12)] (1+ (9%/12))

            =$ 40324.46

The above are for the previous two years’ salary missed now we will calculate for the next 5 years:

So we now will use the present value annuity for the next 5 years as the periodic payments happen in the future and we want to calculate those payments as a lumpsum she can get when she wins the case.

Pv annuity = C [(1-(1+r) ^-n)/i]

                  =$ 3500[(1-(1+(9%/12))^(-12x5))/(9%/12)]

                  = $168606.81

Therefore the total due for salaries if this individual wins the case is  

=$37804.18+ $40324.46 +$168606.81 we add the amounts for the previous two years salaries missed and 5 years salaries to be missed

= $246735.45.

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