2. Your uncle died last year and left you money in his will. You are to receive

Question

2. Your uncle died last year and left you money in his will. You are to receive $80,000 next year (in time 1) and $400,000 twenty years from today (i.e., in time 20).

                        (a) What is the value of the inheritance today (in time 0) if the appropriate                        discount rate is 4% and you compound annually?

                        (b) If you invest the money when you receive it, how much                                                will it grow to 30 years from today (i.e., in time 30) if you earn 4% each                                  year?

Explanation / Answer

Value of inheritance today = (cash flow after 1 year *PVF@4%,1year) +(Cash flow at year 20 *PVF@4%,20year)

                              = (80,000 * .96154) +(400,000 * .45639)

                             = 76,923.20 + 182,556

                            = $ 259,479.20

b) Future value = (cash flow *FVF@4% ,29 years) +(cash flow *FVF@4%,10years)

                       = (80,000 * 3.11865) +(400,000 * 1.48024)

                      = 249,492 + 592,096

                     = $ 841,588

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