5. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement Damages for 25% loss of the use of her right arm Medical expenses Loss of wages Punitive damages $200,000 30,000 10,000 100.000 $340,000 The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assume Barbara is in the 35% marginal tax brncket. What will her after-tax proceeds from accepting the offer? The $300,000 for damages to her arm are excluded due to it being a physical Injury. She will also not be taxed on the $30,000 medical expenses Her tax burden from the proceeds is $0 I What would her after-tax proceeds be if she is granted her proposal? Only the punitive damages of $100,000 will be taxed at the 35% rate, Her tax burden from the proceeds is $35.000 (100,000 x .35) So which would be most advantageous to Barbara? Barbara would be advised to take the company's offer as opposed to her suggestion. Despite the company paying her $10,000 more in damages, the inclusion of punitive damages, which are taxed, results in her receiving only $315,000 for her offer to the company, whecas she receives the full $330,000 under the company's plan