Pastor Michael McAlister has been Senior Pastor for North Faith Church in Tyler, Texas for the past $25$

years. His duties include conducting $3$ weekday services and $5$ weekend services. He also directs all

ministries at the church and manages all external services.

North Faith Church has approximately $7,000$ accounted members. Monthly donations are approximately

$$192,000.$ Total expenses for the church, excluding Pastor McAlister$$s annual salary of $$80,000,$ are

approximately $$22,000.$ These expenses include church maintenance, staff salary, building maintenance,

inventory, etc.

On May $7,$ Pastor McAlister was returning from War Memorial Hospital where he spent over $12$ hours

conducting special services and prayer sessions for church patrons and community patients. As he

approached and attempted to merge on Interstate $65,$ he failed to see the stopped traffic in front of him

and subsequently collided with another vehicle. The driver of the vehicle was $28-$year$-$old Joshua Boone,

a young lawyer and father of $3.$

After further investigation, it was revealed that Pastor McAlister was texting while driving and was

found negligent by the courts. The family of Joshua Boone presented $3$ proposals for Pastor McAlister.

Because Pastor McAlister was on $$work time$$ during the accident, the church and Pastor McAlister have

privately decided to split all costs.

The following are the proposals:

Proposal $1$ Pay the family of Joshua 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 Joshua 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 Knox Hollister called on a

financial expert to do the analysis. You will aid in the process.

MGT $330$: Principles of Finance Final Case Study

Required Questions $1.$ Assuming a discount rate of $6$ percent is used, which of the three

proposals 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 straightforward and require no further

explanation.

$2.$ Now, assume that a discount rate of $11$ percent is used instead of

$6$ percent. Which of the three proposals provides the highest present

value?

$3.$ Explain why the change in outcome takes place between Question $1$ and

Question $2.$

$4.$ If Knox Hollister thinks additional 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 the jury?

$5.$ Should Pastor Michael McAlister be fired by North Faith Church? Explain

your answer and provide evidence to support your opinion.

$6.$ Do you agree or disagree that the church should be using donations and

insurance money to cover Pastor McAlister$$s costs? Explain your answer