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=  = =
=  =
1st 20 years
$3,441,000
Remaining 20 years
+1,789,320
Present value
$5,230,320
Proposal Number Two
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
AA
A
A n I=  = =
=  =
Also
$75 million at the end of 40 years
PV $75,000,000 .097 $7,275,000
=  =
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
A IFA
A
A n I=  = =
=  =
PV FV PV ( 20, 11%) (Ap.B)
PV $3,981,500 .124 $493,706
IF
nI
=  = =
=  =
Total present value
1st 20 years
$2,388,900
Remaining 20 years
+493,706
Present value
$2,882,606
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 nI=  = =
=  =
Total present value
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
should keep in mind that offers for the out-of-court settlement have likely been influenced by the
potential for punitive damages. Also, a jury verdict may be appealed and actual payment may be