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
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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
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Total present value
Proposal Number Two
Present value $5,000,000
$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
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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= ´ = =
= ´ =
Total present value
40 year payment $ 752,300
Payment at end of 40 years +7,275,000
Present value $8,027,300
At a discount rate of 6 percent, proposal three has the highest net present value of $8,027,300.
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
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A
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Also
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
= ´ = =
= ´ =
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Total present value
Proposal Number Two
Present value $5,000,000
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