Let's assume that an uncle of yours was injured on 1/1/05 in an automobile accident. The accident was serious, it was the other driver's fault, and as the result of the accident your uncle will not be able to return to his medical practice where he earned $210,000 during calendar year 2004. Your uncle's accident occurred on his 60th birthday (some birthday) and he planned (prior to the accident) to work another eight years (until the end of 2012).  
Your uncle has sustained a large economic loss because he can no longer count on his substantial earnings from his medical practice. To recover his economic loss, your uncle files suit against the other driver and his insurance company in Wisconsin Civil Court. The case comes to trial at the end of this month, but your uncle has just received a settlement offer from the insurance company of $2,000,000 to compensate him for his loss of past (2005) and future (2006-2012) earning capacity. Your uncle seeks your advice in evaluating the settlement offer. In particular, he asks you whether $2,000,000 meets the standard required in Wisconsin Civil Court "that all future economic damages be expressed in present value terms". [You should know also that the convention in these legal proceedings is to use the Treasury bond rate as the discount rate.]
To give your uncle the advice he seeks you must calcuate the present value of his expected earnings for the years 2005-2012. In making this calculation, assume the following: a) Your uncle (absent the accident) would have continued to work full time in his medical practice from the date of the accident (1/1/05 until his projected retirement on 12/31/2012. b) Your uncle earned $210,000 in 2004 and expected to have his earnings increase in 2005 and each future year by 8% per year. c) Use 4.5% as the annual discount rate to discount projected future earnings to present value. [4.5% is the approximate current yield of U.S. Treasury bonds maturing in 2012.]
1. Explain/show how you...