Question

Your Godmother left you an inheritance of ​$100,000​, payable to you when you turn 26 years old. You are now 21.​ Currently, the annual rate of interest that can be obtained by buying​ 5-year bonds is 3.1 percent. Your mother offers you ​$103,012.02 cash right now to sign over your inheritance. Should you do it? Explain your answer.

Answer 1

Answer:

The offer should be accepted

Explanation:

It is known that the amount $100,000 will be paid to someone when he turns 26 years. The current age is 21 years.

the 5-years bond is given 3.1 percent of interest rate.

another option for the person is offered $103,021.02 right away which is the present value.

The present value of the $100,000 that is going to be received after 5 years is calculated as follows;

Present value =  Amount to be received /(1+interest rate/100)^t

                        = 100,000/(1+ 3.1/100)⁵

                         = 100,000/ 1.031⁵

                         = $85,843.35

Therefore, the present value is $85,843.35 for the amount $100,000 to be receive after five years.

Since the amount  $103,012.02 he was offered is greater than the present value of his inheritance after 5-years, the person should accept the offer  and forget about the inheritance of $100,000.