SOLUTION: You inherit $429,000. You can receive the $429,000 in one lump sum payment today or, alternatively, receive two amounts: $229,000 in 8 months and $220,000 in 21 months from today.

Question 1161012: You inherit $429,000. You can receive the $429,000 in one lump sum payment today or, alternatively, receive two amounts: $229,000 in 8 months and $220,000 in 21 months from today. If you can earn 13.3% per annum compounding monthly on your monies, what is the value of the option to receive two payments (in present day value)?
Found 2 solutions by Theo, MathTherapy:
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
you can receive 429,000 in one lump sum payment today or you can receive 229,000 in 8 months and 220,000 in 21 months.
you can earn 13.3% per year compounded monthly.
the present value of 229,000 received 8 months from today is equal to 229,000 / (1 + .133/12) ^ 8 = 209,671.7258.
the present value of 220,000 received 21 months from today is equal to 220,000 / (1 + .332/12) ^ 21 = 173,540.6939.
the sum of both present value is equal to 209,671.7258 + 173,540.6939 = 384,212.4198. ***** this is your solution.
since this is less than 429,000, take the money up front.
the following excel spreadsheet shows the present value of the 429000 and the present value of the 229000 and the 220000.
it also shows an NPV analysis that shows the present value of all the cash flows to be negative at 13.3% annual rate of return.
it also shows the internal rate of return of the cash flows to be about 3.8%.

since the present value of the cash flows of 229 and 220 is less than 429, then 429 is a better bet.
since the npv is negative, this confirms the 429 up front is a better bet.
since the internal rate of return is less than 13.3%, this also confirms the 429 up front is a better bet.
none of this was needed to answer your question.
your questions was answered up above next to *****.

Answer by MathTherapy(10555) (Show Source): You can put this solution on YOUR website!

You inherit $429,000. You can receive the $429,000 in one lump sum payment today or, alternatively, receive two amounts: $229,000 in 8 months and $220,000 in 21 months from today. If you can earn 13.3% per annum compounding monthly on your monies, what is the value of the option to receive two payments (in present day value)?
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