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?

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