You are entitled to collect a payment of $500,000, 5 years from now

Finance Jan 13, 2021

You are entitled to collect a payment of $500,000, 5 years from now. The interest rate is 4% p.a. You have received an offer of $350,000 today for your entitlement. Should you accept the offer?

Expert Solution

Value of your payment after 5 years = $500,000

Interest rate = 4%

Present value of the payment = $500,000 / (1+4%)⁵ = $500,000 / 1.216653 = $410,963.55

Present value of the payment is greater than the offer you have received ($350,000). Hence you should NOT accept the offer.

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