A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Which of the following amounts is closest to the current value of these payments? The appropriate discount rate is an effective annual rate of 4%.

Question

Quizplus · Accepted Answer

To find the current value of the four payments, we need to discount them at the effective annual rate of 4%. We can use the formula:

PV = FV / (1 + r)n

Where PV is the present value, FV is the future value, r is the effective annual rate, and n is the number of periods.

For the first payment, we have:

PV1 = 50,000 / (1 + 0.04)1 = 48,077.97

For the second payment, we have:

PV2 = 50,000 / (1 + 0.04)2 = 46,216.54

For the third payment, we have:

PV3 = 50,000 / (1 + 0.04)3 = 44,429.11

For the fourth payment, we have:

PV4 = 50,000 / (1 + 0.04)4 = 42,714.22

The current value of the four payments is the sum of the present values:

PV = PV1 + PV2 + PV3 + PV4 = 181,495.84

Therefore, the closest answer choice is C, $181,495.

A Court Settlement Awarded an Accident Victim Four Payments of $50,000