Your Godmother left you an inheritance of $100,000 , payable to you when you turn 26 years old. You are now 21. Currently, the annual rate of interest that can be obtained by buying 5-year bonds is 3.1 percent. Your mother offers you $103,012.02 cash right now to sign over your inheritance. Should you do it? Explain your answer.

Question

Eduardo Pena

Business

29 July, 18:30

Your Godmother left you an inheritance of $100,000 , payable to you when you turn 26 years old. You are now 21. Currently, the annual rate of interest that can be obtained by buying 5-year bonds is 3.1 percent. Your mother offers you $103,012.02 cash right now to sign over your inheritance. Should you do it? Explain your answer.

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Answers (1)

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Jaidyn · Answer 1

The offer should be accepted

Explanation:

It is known that the amount $100,000 will be paid to someone when he turns 26 years. The current age is 21 years.

the 5-years bond is given 3.1 percent of interest rate.

another option for the person is offered $103,021.02 right away which is the present value.

The present value of the $100,000 that is going to be received after 5 years is calculated as follows;

Present value = Amount to be received / (1+interest rate/100) ^t

= 100,000 / (1 + 3.1/100) ⁵

= 100,000 / 1.031⁵

= $85,843.35

Therefore, the present value is $85,843.35 for the amount $100,000 to be receive after five years.

Since the amount $103,012.02 he was offered is greater than the present value of his inheritance after 5-years, the person should accept the offer and forget about the inheritance of $100,000.