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Evgen [1.6K]
3 years ago
7

Helen Ashley is expecting cash flows of $50,000, $75,000, $125,000, and $250,000 from an inheritance over the next four years. I

f she can earn 11 percent on any investment that she makes, what is the present value of her inheritance
Business
1 answer:
romanna [79]3 years ago
5 0

Answer:

Present value of Helen's inheritance is $361,997.25

Explanation:

We know,

Present value of cash flows = ∑\frac{Cash flow for n periods}{(1 + i)^{n} }

Given,

Cash flows for 1st, 2nd, 3rd, and 4th year = $50,000, $75,000, $125,000, and $250,000.

Interest rate, i = 11% = 0.11

Number of period, n = 4

Therefore,

Present value of cash flows = [$50,000 ÷ (1 + 0.11)^{1}] + [$75,000 ÷ (1 + 0.11)^{2}] + [$125,000 ÷ (1 + 0.11)^{3}] + [$250,000 ÷ (1 + 0.11)^{4}]

Present value of cash flows = ($50,000 ÷ 1.11) + ($75,000 ÷ 1.2321) + ($125,000 ÷ 1.3676) + ($250,000 ÷ 1.5181)

Present value of cash flows = $45,045.05 + $60,871.68 + $91,400.99 + $164,679.53

Present value of cash flows = $361,997.25

Therefore, Present value of Helen's inheritance is $361,997.25

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