Question

Problem #2 Assume you are the plaintiff and have won a structured settlement from a lawsuit that entitles you to $100,000 each year for the next ten years as your legal settlement. Not being satisfied with the 10-year payout, you decide to explore the option of taking a lump sum cash payout now. Afterall, it is your money and why can't you have it now! An attorney from J. G. Wentworth is offering you $675,000 in cash to buy out your settlement. If the market rate of interest is 5%, would this offer be a good deal for you or not? Explain and show any calculation used to make your conclusion.

Answer 1

Time Value of Money:

This question deals with theory of time value of money where the plaintiff has two alternatives, Either have all money now in lump sum cash payment of $675,000 or accept an annual payout of $100,000 for next 10 years. We shall find out the present worth for both alternatives and compare both of them at the common time frame to decide which option is better for the plaintiff.

Alternative 1: 10 Year Pay-out:

As it is not clear whether this payment will begin from now (Year 0) or at the end of the Year from now (Year 1), We have worked out the present value of this alternative both ways. Please consider the calculation that suits your assumption.

a) Assuming Payout will begin at end of the year:

Year	Payout	PV Factor @ 5%	Present Value
1	$100,000	0.95238	$95,238
2	$100,000	0.90702	$90,702
3	$100,000	0.86383	$86,383
4	$100,000	0.82270	$82,270
5	$100,000	0.78352	$78,352
6	$100,000	0.74621	$74,621
7	$100,000	0.71068	$71,068
8	$100,000	0.67683	$67,683
9	$100,000	0.6446	$64,460
10	$100,000	0.61391	$61,391
Present Value of 10 year Pay-out			$772,168

b) Assumuing Payout will begin now:

Year	Payout	PV Factor @ 5%	Present Value
1	$100,000	1	$100,000
2	$100,000	0.95238	$95,238
3	$100,000	0.90702	$90,702
4	$100,000	0.86383	$86,383
5	$100,000	0.8227	$82,270
6	$100,000	0.78352	$78,352
7	$100,000	0.74621	$74,621
8	$100,000	0.71068	$71,068
9	$100,000	0.67683	$67,683
10	$100,000	0.64460	$64,460
Present Value of 10 year Pay-out			$810,777

Alternative 2: Accept Lump sum cash of $675,000 now.

Conclusion:

If you compare both alternatives, It is evident that the Value of a 10-year payout is more (irrespective of which assumption is chosen for the timing of first payment) than the alternative of choosing Lump sum cash. Hence, the Plaintiff should not accept the offer made by Attorney of J.G. Wentworth.