Question 1

Question

You will receive an inheritance of
$
500
,
000
$500,000 in 20 years on your 40th birthday. What is the value of the inheritance today if the discount rate is
10
%
10%?

74
,
321.81
74,321.81

500
,
000
500,000

3
,
363
,
749
3,363,749

50
,
000
50,000

Answer 1

To find the present value (PV) of the inheritance, we can use the present value formula:

\[ PV = \frac{FV}{(1 + r)^n} \]

Where:

• \( FV \) is the future value ($500,000)
• \( r \) is the discount rate (10% or 0.10)
• \( n \) is the number of years until the inheritance is received (20 years)

Plugging in the values:

\[ PV = \frac{500,000}{(1 + 0.10)^{20}} \]

Calculating \( (1 + 0.10)^{20} \):

\[ (1.10)^{20} \approx 6.7275 \]

Now, calculate the present value:

\[ PV \approx \frac{500,000}{6.7275} \approx 74,321.81 \]

Therefore, the present value of the inheritance today is $74,321.81.