Question

You inherit $402,000. You can receive the $402,000 in one lump sum payment today or, alternatively, receive two amounts: $202,000 in 8 months and $220,000 in 21 months from today. If you can earn 13.1% per annum compounding monthly on your monies, what is the value of the option to receive two payments (in present day value)?

(to nearest whole dollar,; don’t use $ sign or commas)

Answer 1

Amount received after 8 months = C1 = 202000

Amount received after 21 months = C2 = 220000

Annual interest rate = r = 13.1%

Monthly rate of interest = rm = 13.1%/12 =

Present value of this option to receive two payments is calculated using the formula:

Present Value = PV = C1/(1+rm)8 + C2/(1+rm)21 = 202000/(1+(13.1%/12))8 + 220000/(1+(13.1%/12))21 = 185194.683944166 + 175145.98678016 = 360340.670724326 ~ 360341 (Rounded to nearest dollar)

Answer ($) -> 360341