Allison Boone, M.D. Allison Boone had been practising medicine for seven years. Her specialty was neurology. She had received her bachelor's degree in chemistry from the University of Toronto and her M.D. from McMaster University. She did her residency at Toronto General Hospital. Allison practised neurology in a clinic with three other doctors in Toronto. Her husband, Samuel L. Boone, held an administrative position at the Toronto Dominion Bank. Allison and Samuel had been married for five years and were the parents of young twin sons, Todd and Trey. They lived in the Beaches area in a beautiful fourroom house overlooking Lake Ontario. Allison normally left for work at 7:30 a.m. and closed her office at 5:30 p.m. to return home. On Tuesday, July 6, 20XX, at 5:15 p.m., she received an emergency call from Toronto 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 along Lakeshore Boulevard, she was confronted headon by a drunken driver going over 110 kilometres 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. Whitaker was with a Toronto law firm (Hanson, Whitaker, and Thomason) that specialized in plaintiff's lawsuits. He had been in practice for over 20 years since graduating from Osgoode Law School. When Whitaker 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 of alcohol abuse and that Wayland Frozen Foods Inc. had knowledge of the problem when it 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 its truck to make a businessrelated 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), 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 Proposal 2 Proposal 3 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. Pay the family a lumpsum payment of $5 million today. 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