I inherited $10,000 which I can't touch for 5 years. If I had the money today and am able to get 12% interest, what is the present value of my inheritance?
The amount inherited is $10000 and is locked in locked in an account such that it can be withdrawn only after 5 years. If the money could be withdrawn today there is an option to invest it at an annual rate of interest of 12%. If that is done $10000 after 5 years it would increase to 10000*(1+0.12)^5 = $17623.41
The present value of the inheritance is an amount that accessible today would yield $10000 after 5 years. If the present value is P, P can be invested at 12% per annum and yields $10000 after 5 years. P*(1 + 0.12)^5 = 10000
P = 10000/(1 + 0.12)^5
=> P = $10000/(1.12)^5
=> P = $5674.26
The present value of the inheritance is $5674.26