
Concept explainers
1.
To compute: The
It refers to the ability of the person to buy something. Purchasing power decreases with an increase in inflation and increase with the decrease in inflation.
1.

Explanation of Solution
Salary 2 years back is $37,000.
Annual rate of interest is 7.56% (working note).
EAR is 7.80%.
Monthly salary of previous year is $39,000.
Formula to calculate the
Substitute $37,000 divided by 12 for monthly salary, 7.56% for rate of interest and 12 months for time and 7.8% for EAR.
Hence, the present value of salary 2 years back is $38,878.80.
Substitute $39,000 divided by 12 for monthly salary, 0.63% for rate of interest and 12 months for time.
Hence, the present value of salary 1 year back is $40,663.19.
2.
To compute: The present value of five years future salary.
2.

Explanation of Solution
Given,
Monthly salary is $43,000.
Formula to calculate the present value of next 5 years,
Substitute $43,000 for monthly salary and 49.834,
Hence, the present value of next 5 years is $178,571.67.
3.
To calculate: The total amount paid to plaintiff.
3.

Explanation of Solution
Given,
Suffering expenses is $150,000.
Court expenses are $25,000.
Formula to calculate the total amount paid to plaintiff,
Substitute $41,152.33 for the present value of 2 years back, $40,238.25 for the present value of 1 year back, $178,571.67 for the present value of next 5 years, $150,000 for suffering expenses and $25,000 for court expenses.
Hence, the total amount paid to plaintiff is $434,962.25.
Working note:
Computation of the annual percentage rate,
Hence, annual percentage rate is 7.56%.
Therefore, the lower rate of interest would be preferred by the plaintiff as to get the lowering of the future value.
Hence, the total amount paid to plaintiff is $434,962.25.
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Chapter 4 Solutions
EBK CORPORATE FINANCE
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