Tod Lohman has filed a lawsuit against the party alleged to be at fault in an accident resulting in his total disability. You have been hired to provide expert testimony during the damage phase of the trial concerning the present value of Mr. Lohman's lost earning power. At the time of the accident, Mr. Lohman was earning a yearly salary of $140,000. Work expectancy tables provided by the Bureau of Labor Statistics show that Mr. Lohman would have been expected to work another 25 years before retiring. The demand for specialists with Mr. Lohman's training and work history indicate that a combination of job performance and cost of living adjustments would have permitted his earnings to increase by roughly 5.8 percent per year throughout his career. Southwestern Mutual Life's actuarial tables indicate that Mr. Lohman has a current life expectancy of 40 years. Assuming that prices are expected to increase steadily at 4.0 percent per year over the next 40 years and that the money from any damage award can be invested at 11 percent per year.
a. Determine the economic (present) value of Mr. Lohman's lost earnings.
b. Determine the initial yearly income that could be provided from a damage award equal to the amount in part (a) assuming that Mr. Lohman would want the purchasing power of his yearly income to remain constant for his remaining lifetime.