Question

Helen Ashley is expecting cash flows of $50,000, $75,000, $125,000, and $250,000 from an inheritance over the next four years. If she can earn 11 percent on any investment that she makes, what is the present value of her inheritance

Answer 1

Answer:

Present value of Helen's inheritance is $361,997.25

Explanation:

We know,

Present value of cash flows = ∑$\frac{Cash flow for n periods}{(1 + i)^{n} }$

Given,

Cash flows for 1st, 2nd, 3rd, and 4th year = $50,000, $75,000, $125,000, and $250,000.

Interest rate, i = 11% = 0.11

Number of period, n = 4

Therefore,

Present value of cash flows = [$50,000 ÷ $(1 + 0.11)^{1}$] + [$75,000 ÷ $(1 + 0.11)^{2}$] + [$125,000 ÷ $(1 + 0.11)^{3}$] + [$250,000 ÷ $(1 + 0.11)^{4}$]

Present value of cash flows = ($50,000 ÷ 1.11) + ($75,000 ÷ 1.2321) + ($125,000 ÷ 1.3676) + ($250,000 ÷ 1.5181)

Present value of cash flows = $45,045.05 + $60,871.68 + $91,400.99 + $164,679.53

Present value of cash flows = $361,997.25

Therefore, Present value of Helen's inheritance is $361,997.25

Answer 2

The present value of the inheritance when it can earn 11 percent should be $361,998.40.

Calculation of the present value:

We know that

Present value = FV / (1 + i)n

So,

Present value of her inheritance:

= $50,000/(1.11) + $75,000/(1.11)^2 + $125,000/(1.11)^3 + $250,000/(1.11)^4

= $361,998.40

hence, we can conclude that The present value of the inheritance when it can earn 11 percent should be $361,998.40.

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