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Allison Boone, M.D. Case 10
Time Value of Money
Purpose: The case brings the time value of money into a legal settlement context, where present value
concepts are frequently utilized. Many professors may also be able to draw on their own personal
expertise to enhance the discussion of the case. The case deals with a high earning medical doctor and
the loss to her family as a result of an accident.
Relation to the Text: The case should follow Chapter 9.
Complexity: The case is moderately complex and should require 1 hour.
Solutions
1. Proposal Number One
$300,000 a year for the next 20 years
PV PV ( 20, 6%) (Ap.D)
PV $300,000 11.470 $3,441,000
A IFA
A
A n I= ´ = =
= ´ =
Also
$500,000 a year for the remaining 20 years
Step 1
PV PV ( 20, 6%) (Ap.D)
PV $500,000 11.470 $5,735,000
2
PV FV PV ( 20, 6%) (Ap.B)
PV $5,735,000 .312 $1,789,320
A IFA
A
IF
A n I
Step
n I
= ´ = =
= ´ =
= ´ = =
= ´ =
Total present value
1st 20 years $3,441,000
Proposal Number Two
$5,000,000luePresent va
Proposal Number Three
$50,000 a year for the next 40 years
PV PV ( 40, 6%) (Ap.D)
PV $50,000 15.046 $752,3000
A A
A
A n I= ´ = =
= ´ =
Also
$75 million at the end of 40 years
PV FV PV ( 40, 6%) (Ap.B)
PV $75,000,000 .097 $7,275,000
IF
n I= ´ = =
= ´ =
2. Change the discount to 11 percent
Proposal number one
$300,000 a year for the next 20 years
PV PV ( 20, 11%) (Ap.D)
PV $300,000 7.963 $2,388,900
A IFA
A
A n I= ´ = =
= ´ =
Also
$500,000 a year for the remaining 20 years
Step 1
PV PV ( 20, 11%) (Ap.D)
PV $500,000 7.963 $3,981,500
2
PV FV PV ( 20, 11%) (Ap.B)
PV $3,981,500 .124 $493,706
A IFA
A
IF
A n I
Step
n I
= ´ = =
= ´ =
= ´ = =
= ´ =
Total present value
1st 20 years $2,388,900
Proposal Number Two
$5,000,000luePresent va
Proposal Number Three
$50,000 a year for the next 40 years
PV PV ( 40, 11%) (Ap.D)
PV $50,000 8.951 $447,550
A IFA
A
A n I= ´ = =
= ´ =
Also
$75 million at the end of 40 years
PV FV PV ( 40, 11%) (Ap.B)
PV $75,000,000 .015 $1,125,000
IF
n I= ´ = =
= ´ =
Total present value
40 year payment $ 447,550
Payment at end of 40 years +1,125,000
Present value $1,572,550
At a discount rate of 11 percent, proposal two has the highest value of $5,000,000.
3. At a relatively high discount rate of 11 percent in question 2, the later payments lose much of their
value. For example, the $75 million payment as part of proposal three only has a present value of
4. Punitive damages are added on to the economic damages. With the likelihood of $4 million in
punitive damages, Sloan Whitaker may well want to take the case before a jury. However, we
Because attorneys in cases such as this often get 1/3rd of the out-of-court settlement (or the jury
determined value) as their fee, Sloan Whitaker is likely to consider this matter quite seriously. Of
Although this question is not a financial one, it has financial implications for the student doing the
case.
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