Question

Lisa Preston is 22 years old, and her grandmother has remembered Lisa in her will, which is now being probated. Lisa has been bequeathed either a cash payment today of $35,000 or a cash payment on her birthday six years from now of $75,000. Assuming an annual interest rate of 5%, Lisa should take the cash and run.TrueFalse

Answer 1

Answer:

False, Lisa should wait 6 years

Explanation:

Hi, in order to decide, we have to bring to present value both cash amounts, since $35,000 are already in the present, we will only have to bring to present value the $75,000 payment that will take place 6 years from no, we do this with the following formula.

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

$PV=\frac{75,000}{(1+0.05)^{6} } =55,966.15$

So, if she waits for 6 years, she will receive today´s equivalent to $55,966.15 instead of $35,000 today.

best of luck.