Allison Boone had been practicing

medicine for seven years. Her specialty

was neurology. She had received her

bachelor$$s degree in chemistry from Kent

State University and her M$.$D$.$ from

Washington University in St$.$ Louis. She

did her residency at Columbia

Presbyterian Hospital in New York.

Allison practiced neurology in a clinic

with three other doctors in Hurst, Texas.

Her husband, Samuel L$.$ Boone, held an

administrative position for Harris

Methodist HMO in Arlington, Texas.

Allison and Samuel had been married for

five years and were parents of young twin

sons, Todd and Trey. They lived in

Arlington in a beautiful four$-$room house

overlooking Lake Arlington.

Allison normally left for work at $7$:$30$

a$.$m$.$ and closed her office at $5$:$30$ p$.$m$.$ to

return home. On Tuesday, March $6$

th

$,2016$

at $5$:$15$ p$.$m$.,$ she received an emergency

call from Arlington General Hospital and

immediately went to the hospital to help a

patient who had suffered serious brain

damage. By the time she had administered

aid and helped prepare the patient for

surgery it was $11$:$00$ p$.$m$.$On her way home as she passed the

Ballpark in Arlington $($home of the Texas

Rangers baseball team$),$ she was

confronted head on by a drunken driver

going over $80$ miles an hour. A crash was

inevitable and Allison and the other driver

were killed instantly. The drunken driver

was making a late delivery for Wayland

Frozen Foods, Inc.

Legal Considerations

The families of both drivers were

devastated by the news of the accident.

After the funeral and explaining the

situation to the children, Samuel Boone

knew he must seek legal redress for his

family$$s enormous loss. Following

interviews with a number of lawyers, he

decided to hire Sloan Whitaker.

Sloan was with a Dallas law firm

$($Hanson$,$ Sloan, and Thomason$)$ that

specialized in plaintiff$$s lawsuits. He had

been in practice for over $20$ years since

graduating from Southern Methodist

University $($SMU$)$ law school in $1996.$

When Sloan began his investigation on

behalf of Samuel Boone and his family, he

was surprised to find out the driver of the

delivery vehicle had a prior record ofalcohol abuse and that Wayland Frozen Foods, Inc. had knowledge of the problem when

they hired him. It appears the driver was a relative of the owner and at the time of

employment he revealed what he termed $$a past alcoholic problem that was now under

control.$$ In any event, he was acting as an employee for Wayland Frozen Foods in using

their truck to make a business related delivery at the time of the accident. The fact that he

was speeding and intoxicated at the time of the impact only increased the legal exposure

for Wayland Frozen Foods.

After much negotiating with the law firm that represented Wayland Frozen Foods

$($and its insurance company$),$ Sloan Whitaker received three proposals for an out$-$of$-$court

settlement to be paid to Allison Boone$$s family. The intent of the proposals was to replace

the future earning$$s power 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 lump sum 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, attorney Sloan

Whitaker called on a financial expert to do the analysis. You will aid in the process

Q#$1$

$1.$ Assume a discount rate of $6$ percent is used, which of the three projects

has the highest present value?

In analyzing the first proposal, take the present value of the

$20-$year $$300,000$ annuity. Then take the present value of

the deferred annuity of $$500,000$ that will run from the $21$st through

the $40$th year. The answer you get for the second annuity will represent

the value at the beginning of the $21$st year $($the same as the end of the

$20$th year$).$ You will need to discount this lump sum value back for $20$

years as a single amount to get its present value. You then add together

the present value of the first and second annuity.

The second and third proposals are straight forward and require no

further explanation.