1. Current Long-Term Interest Rate: 0.558%

A) Using a current long-term interest rate, recommend a proposal to the Boone family. Justify your choice of discount rate.

Proposal 1:

$300,000 per year for initial 20 years N = 20 i = 0.558% PMT = $300,000 FV = 0 Using a financial calculator: PV = $5,662,395.55

$500,000 per year for following 20 years N = 20 i = 0.558% PMT = $500,000 FV = 0 Using a financial calculator: PV = $9,437,325.92 The above must be discounted to the present: N = 20 i = 11% PMT = 0 FV = $9,437,325.92 Using a financial calculator: PV = $8,443,381.93

PV = $5,662,395.55 + $9,437,325.92 = $15,099,721.47

Proposal 2: Present Value: Pay the family a lump sum payment of $5 million today.

Proposal 3

n = 40

Yield = .558%

PMT = $50,000

FV = 0

PV = $1,788,070.74

n = 40

Yield = .558%

PMT = 0

FV = $75,000,000

PV = $60,033,847.89

Present Value for Proposal 3: $60,033,847.89 + $1,788,070.74 = $61,821,918.63

Proposal 1 Present Value: $15,099,721.47

Proposal 2: Present Value: Pay the family a lump sum payment of $5 million today.

Proposal 3: Present Value: $60,033,847.89

2. Discount Rate: 11%

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

Proposal 1:

$300,000 per year for initial 20 years N = 20 i = 11% PMT = $300,000 FV = 0 Using a financial calculator: PV = $2,388,998.44

$500,000 per year for following 20 years N = 20 i = 11% PMT = $500,000 FV = 0 Using a financial calculator: PV = $3,981,664.06 The above must be discounted to the present: N = 20 i = 11% PMT = 0 FV = $3,981,664.06 Using a financial calculator: PV = $493,861.35

PV = $2,388,998.44 + $493,861.35 = $2,832,859.79

Proposal 2: Present Value:$5,000,000

Note: No calculation is required for the second proposal because $5,000,000 represents today's present value.

Proposal 3

n = 40

Yield = .11

PMT = $50,000

FV = 0

PV = $447,552.54

n = 40

Yield = .11

PMT = 0

FV = $75,000,000

PV = $ 1,153,830.7

Total Present Value for Proposal 3: $447,552.54 + $1,153,830.76 = $1,601,383.30

Proposal 1 Present Value: $2,832,859.79

Proposal 2: Present Value:$5,000,000

Proposal 3: Present Value: $1,601,383.30

Analysis & Comments:

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?

Please answer c and d.