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    Anna Waldheim

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    P4-51 Interest rate for an annuity Anna Waldheim was seriously injured in an industrial
    accident. She sued the responsible parties and was awarded a judgment of
    $2,000,000. Today, she and her attorney are attending a settlement conference
    with the defendants. The defendants have made an initial offer of $156,000 per
    year for 25 years. Anna plans to counteroffer at $255,000 per year for 25 years.
    Both the offer and the counteroffer have a present value of $2,000,000, the
    amount of the judgment. Both assume payments at the end of each year.
    a. What interest rate assumption have the defendants used in their offer
    (rounded to the nearest whole percent)?
    b. What interest rate assumption have Anna and her lawyer used in their
    counteroffer (rounded to the nearest whole percent)?
    c. Anna is willing to settle for an annuity that carries an interest rate assumption
    of 9%. What annual payment would be acceptable to her?

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    Solution Preview

    P4-51 Interest rate for an annuity Anna Waldheim was seriously injured in an industrial
    accident. She sued the responsible parties and was awarded a judgment of
    $2,000,000. Today, she and her attorney are attending a settlement conference
    with the defendants. The defendants have made an initial offer of $156,000 per
    year for 25 years. Anna plans to counteroffer at $255,000 per year for 25 years.
    Both the offer and the counteroffer have a present value of ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer the interest rate assumption and the payment to be acceptable by Anna.

    $2.19