Calculating the present value of an annuity
In a widely publicized case in California, the ex-wife of a doctor sued to obtain half the value of his medical degree, on the grounds that she had helped put him through medical school and was entitled to half of everything they owned under California's community property law.
The wife's attorney asked for $250,000 as her share of the value of her ex-husband's medical training. Suppose the medical degree could be conservatively expected to add $30,000 per year for 30 years to what the doctor would have earned without the degree. Because this amount will presumably rise with any inflation that occurs over the period, a real, rather than nominal interest rate should be used to find out its present value.
Would you support the ex-wife's attorneys in their estimate of what she was entitled to? Yes
What is one-half the present value of a $30,000 annuity for 30 years when discounted at 4 percent?