Answer to Question #140356 in Finance for Jenelle Daniel

Question

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?

Answer 1

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).