Question

Todd will gain access to his inheritance of $13,000 in exactly 4 years. Todd discounts cash at 5 percent annually. What is the minimum amount Todd would accept today in exchange for his inheritance?

Answer 1

The minimum amount Todd would accept today to forgo his $13,000 inheritance that he would receive in 4 years, discounted at an annual rate of 5%, is $10,704.42.

Step-by-step explanation:

To determine the minimum amount that Todd would accept today in exchange for his $13,000 inheritance in 4 years, considering he discounts cash at an annual rate of 5%, we use the present value formula:

Present Value = Future Value / (1 + Discount Rate)^Number of Years

Plugging in Todd's numbers, we get:

Present Value = $13,000 / (1 + 0.05)^4

Calculating further:

Present Value = $13,000 / (1.05)^4

Present Value = $13,000 / 1.21550625

Present Value = $10,704.42 (rounded off to two decimal places)

Therefore, the minimum amount Todd would accept today to forgo his $13,000 inheritance in 4 years is $10,704.42.