Allison Boone Case Discount rates Proposal 1 Proposal 2 Proposal 3 Proposal 1 Proposal 2 Proposal...

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Allison Boone Case Discount rates Proposal 1 Proposal 2 Proposal 3 Proposal 1 Proposal 2 Proposal 3 6% 11% 300,000 a year for the next 20 years, then 500,000 a year for next 20 years Lump sum of $5 million today 50,000 a year for 40 years, then lump sum of $75 million 300000 5000000 50000 20 500000 40 75000000 20 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 21st through the 40th year. The answer you get for the second annuity will represent the value at the beginning of the 21st year (the same as the end of the 20th 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. 2. Now assume that a discount rate of 11 percent is used instead of 6 percent. Which of the three alternatives provides the highest present value? 3. Explain why the change in outcome takes place between question 1 and question 2. 4. If Sloan Whitaker thinks additional punitive damages are likely to be $4 million in a jury trial, should he be more likely to settle out-ofcourt or go before the jury? Allison Boone Case Discount rates Proposal 1 Proposal 2 Proposal 3 Proposal 1 Proposal 2 Proposal 3 6% 11% 300,000 a year for the next 20 years, then 500,000 a year for next 20 years Lump sum of $5 million today 50,000 a year for 40 years, then lump sum of $75 million 300000 5000000 50000 20 500000 40 75000000 20 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 21st through the 40th year. The answer you get for the second annuity will represent the value at the beginning of the 21st year (the same as the end of the 20th 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. 2. Now assume that a discount rate of 11 percent is used instead of 6 percent. Which of the three alternatives provides the highest present value? 3. Explain why the change in outcome takes place between question 1 and question 2. 4. If Sloan Whitaker thinks additional punitive damages are likely to be $4 million in a jury trial, should he be more likely to settle out-ofcourt or go before the jury?

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To answer your questions lets analyze each proposal and calculate their present values using the given discount rates Discount Rate 6 Proposal 1 Annui... View the full answer