Question

# You inherit \$527,000. You can receive the \$527,000 in one lump sum payment today or, alternatively,...

You inherit \$527,000. You can receive the \$527,000 in one lump sum payment today or, alternatively, receive two amounts: \$327,000 in 7 months and \$220,000 in 21 months from today. If you can earn 5.5% per annum compounding monthly on your monies, what is the value of the option to receive two payments

To consider the Present value of option we have to find Present value for both cash inflow.

PV = FV / (1+r)n

Where FV = Future value, R = rate of Interest, n = number of periods.

Here We have interest compounding on a monthly basis. So, monthly interest rate = 5.5/12 = 0.4583333%

PV of \$327,000 receivable after 7 months from today.

= 327000/ (1+0.004583)7

= \$316,698

PV of \$327,000 receivable after 7 months from today.

= 220000/ (1+0.004583)21

= \$201,673

So, the total value of the alternative option is

\$316,698 + \$201,673 = \$518,371

#### Earn Coins

Coins can be redeemed for fabulous gifts.