Suppose one day you were driving along a familiar county road a few hours after a torrential rain storm. All the creeks are full or over-flowing their banks.
As you begin to cross a partially submerged bridge, the bridge gives way. You manage to get to safety but your new truck and trailer are almost a total loss.
The county commissioners refuse to pay for your property loss saying you are a dunderhead for trying to cross under such conditions. You claim they should have known it was a weak bridge and closed the road. You sue in district court and win a $60,000 judgment.
Only trouble is, by law, the county has 3 years to pay you, including interest (set by the court), and the first payment is one year away.
Your lawyer offers you $58,000 if you will "assign" the judgment payments to him. That is, he will buy the stream of payments from you.
You decide that 6% is a reasonable discount rate to use in considering this offer. Calculate the present value of the three payments, then decide if you will accept the $58,000.
Payment 1 (end of year 1) = $20,600
Payment 2 (end of year 2) = $21,200
Payment 3 (end of year 3) = $20,600
Present Value of Payments = ________
Accept the offer? Why or why not?