Stan Sweeney turned 20 years old today His grandfather established a trust for h

ID: 2505132 • Letter: S

Question

Stan Sweeney turned 20 years old today His grandfather established a trust for him that will pay 80,000 on his next birthday. But he need money today. His father is willing to help by giving him the present value of the future cash inflow, assuming a 10 percent rate of return? How can I use a present vlue table to determine the amount of cash that Stan's father should give him. What algebraic formula could I use to prove that the present value of the trust amount is equal to its 80,000 future value?

Explanation / Answer

How can I use a present value table to determine the amount of cash that Stan's father should give him.

Ans:- By finding the Present value factor of 10% for one year and then multiplying it with the cash inflow which is going to come at the end of one year

Present value factor of 10% for one year = 1/1.10

= 0.909091

Present value of the future cash inflow 0f $80000 = 80000*0.909091

= $72727.28 [ans]

What algebraic formula could I use to prove that the present value of the trust amount is equal to its 80,000 future value?

Ans:- Future Value = Present value * (1+rate of return)^no of years

Therefore,

Future value = 72727.28*(1.10^1)

= $80000