You have a trust fund that will pay you $1 million exactly ten years from today.

Question

You have a trust fund that will pay you $1 million exactly ten years from today. You want cash now, so you are considering an opportunity to sell the right to the trust fund to an investor. A. What is the least you will sell your claim for if you could earn the following rates on return on similar risk investments during the ten-year period? 1. 6% 2. 9% 3. 12% B. Rework part (a) under the assumption that the $1 million payment will be received in fifteen rather than ten years. C. Based on your findings in parts (a) and (b), discuss the effects of both the size of the rate and return and the time until receipt of payment on the present value of a future sum.

Explanation / Answer

a.1. PV = 1000000/[1+(.06)]10 = $558,394.78   

a.2. PV = 1000000/[1+(.09)]10 = $422,410.81   

a.3. PV = 1000000/[1+(.12)]10 = $321,973.24

b.1. PV = 1000000/[1+(.06)]15 = $417,265.06

b.2. PV = 1000000/[1+(.09)]15 = $274,538.04

b.3. PV = 1000000/[1+(.12)]15 = $182,696.26

c. It becomes clear that as the rate of return increases, the amount required to invest decreases in order to yield the same return on investment. Additionally, when the time until receipt of payment increases, the required investment amount decreases proportionately.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.