Answer to Question #140356 in Finance for Jenelle Daniel

Question #140356
Your grandfather left an inheritance for you of $100,000. However you can only drawdown on the investment as follows:

Years 1 – 3 $15,000 each year
Year 4 to 6 $10,000 each year
Year 7 $25,000
Interest on the fund is 5%.

a) What is the present worth of this inheritance?
b) Due to high liquidity interest rate have dropped to 4%. What will be the impact on the present worth of this inheritance as a consequence of the market change?
1
Expert's answer
2020-10-28T15:57:47-0400

a) Present worth of this heritance -


Present worth = discounted value of future cash inflow (discounted @ 5%)


= 81550 ( as per calculation given below)


Year Drawdown PFV @ 5% Present Value

1 15000 0.95 14250

2 15000 0.9 13500

3 15000 0.86 12900

4 10000 0.82 8200

5 10000 0.78 7800

6 10000 0.74 7400

7 25000 0.7 17500

81550

b ) Impact on present worth due to interest rate change


Year Drawdown PFV @ 4% Present Value

1 15000 0.96 14400

2 15000 0.92 13800

3 15000 0.96 14400

4 10000 0.92 9200

5 10000 0.96 9600

6 10000 0.92 9200

7 25000 0.96 24000

94600

As a consequence of market rate change (i.e interest rate change from 5% to 4%) the present net work of inheritance will increase by 13050 ( 94600-81550).


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