Question

On a rainy afternoon two years ago, John Smiley left work early to attend a family birthday party. Eleven minutes later, a careening truck slammed into his SUV on the freeway causing John to spend two months in a coma. Now he can't hold a job or make everyday decisions and is in need of constant care. Last week, the 40-year-old Smiley won an out-of-court settlement from the truck driver's company. He was awarded payment for all medical costs and attorney fees, plus a lump-sum settlement of $2,330,716. At the time of the accident, John was president of his family's business and earned approximately $200,000 per year. He had anticipated working 25 more years before retirement.8

John's sister, an acquaintance of yours from college, has asked you to explain to her how the attorneys came up with the settlement amount. “They said it was based on his lost future income and a 7% rate of some kind,” she explained. “But it was all ’legal-speak’ to me.”

Required:
How was the amount of the lump-sum settlement determined? Create a calculation that might help John's sister understand.



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  • CreatedJune 24, 2013
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