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.....After much negotiating with the law firm that represented Wayland Frozen Foods (and its insurance company), Whitaker received three proposals for an outofcourt settlement to

.....After much negotiating with the law firm that represented Wayland Frozen Foods (and its insurance company), Whitaker received three proposals for an outofcourt settlement to be paid to Allison Boone's family. The intent of the proposals was to replace the future earnings of Allison Boone, less any of the earnings she would have personally needed for her normal living requirements. Also, the value that she provided for her family as a wife and mother, quite aside from her earning power, had to be considered. Finally, there was the issue of punitive damages that Wayland Frozen Foods was exposed to as a result of letting an unqualified driver operate its truck. If the case went to court, there was no telling how much a jury might assign to this last factor.

The three proposals are listed below. An actuarial table indicated that Allison, age 37 at the time of the accident, had an anticipated life expectancy of 40 more years. Proposal 1 Pay the family of Allison Boone $300,000 a year for the next 20 years, and $500,000 a year for the remaining 20 years. Proposal 2 Pay the family a lumpsum payment of $5 million today. Proposal 3 Pay the family of Allison Boone a relatively small amount of $50,000 a year for the next 40 years, but also guarantee them a final payment of $75 million at the end of 40 years.

In order to analyze the present value of these three proposals, Whitaker called on a financial expert to do the analysis. You will aid in the process.

a. Using a current longterm interest rate, recommend a proposal to the Boone family. Justify your choice of discount rate.

b. Now assume that a discount rate of 11 percent is used. Which of the three alternatives provides the highest present value?

c. Explain why the change in outcome takes place between part a and part b.

d. If Whitaker thinks punitive damages are likely to be $4 million in a jury trial, should he be more likely to settle out of court or go before a jury?

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