A number of professional team owners are working to change workers’ compensation ( WC ) laws in Illinois. They believe that they are being treated unfairly because the WC laws were designed to compensate factory workers who were injured on the job. After a worker sustained an injury, he/she would be able to collect a certain percentage of his/her wages (salary) until age 6 7. The owners want to limit the payments to age forty-five. Consider the case of Tari k Cohen, a 23-year old professional football player (a running back). If Cohen were injured, his team would be responsible for paying him 2/3’s of his $6,000,000 salary for the next forty-four years. Statistics show that the average running back plays about four years, but some have managed to play into their thirties. Using a discount rate of 12% compounded semiannually and assuming an immediate injury, determine:
a . The present value of the team’s obligation to Cohen under current law;
b. The present value if, using the average playing life, the team only had to pay Cohen for the first four years after his injury; and
c. The present value if the team only had to pay Cohen until he reached the age of 45 (twenty-two years).
Suppose that the players’ union presented a counterproposal to the owners (and the state). They would agree to a limit on the length of the payments if the owners agreed to include annual cost of living escalators Continue to use the 12% (compounded semiannually) discount rate and assume that the cost of living would escalate at a 2.36% rate per year. Determine
a. The present value of the team’s obligation if they only had to pay Cohen for four years; and
b. The present value of the team’s obligation if they only had to pay C ohen for twenty years.