Anna Waldheim was seriously injured in an indus-

trial 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 coun-

teroffer (rounded to the nearest whole percent)?

c. Anna is willing to settle for an annuity that carries an interest rate assump-

tion of 9%. What annual payment would be acceptable to her?