You have just learned that you are a beneficiary in the will of your late Aunt S

Question

You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance. Click here to view Exhibit 11B-1 and Exhibit 11B-2. To determine the appropriate discount factor(s) using tables. Required: Calculate the present value for the following assuming that the money can be invested at 12% percent. (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Present Value You may receive $75,000 immediately. You may receive $98,000 at the end of six years. You may receive $32,000 at the end of each year for six years (a total of $192,000). If you can invest money at a 12% return, which option would you prefer? Option a Option b Option c

Explanation / Answer

option c has the highest present value so it should be prefered.

PV of cash flow = cashflow/(1+i)^n, where i = 12% and n = 6

and present value of annuity which is option c

= c* (1-(1+i)^-n)/i, where c= 32000 n=6 and i=12%

present value $ 75,000 immediately                75,000 $ 98,0000 after six years                49,650 $32,000 at the end of each year for 6 years              131,565

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