Question

A rich uncle allows you to stipulate which of two ways you receive your inheritance:

a. $850,000 one year after his death or

b. $250,000 on his death and $200,000 each year at the end of the first, second and third years following his death. If money is worth 10%, what is the relative advantage of the more attractive alternative?

Answer 1

For the computing of better alternative option, we have to calculate present value of both the option first:

a.

Present Value = $850000 x present value interest factor (r,n)

= $850000 x Present value interest factor (10% , 1)

= $850000 x 0.90909 = $772726.5

b.

Present Value = $250000 + $200000 x Present Value Annuity factor (10%,3)

= $250000 + $200000 x 2.48685

= $250000 + $497370

= $747370.

Conclusion : Present Value of Option 1 i.e. $850000 one years after his death is best.