Thorton will receive an inheritance of $500,000 three years from now. Thorton's personal discount rate corresponds to a 10% interest rate compounded semiannually. Which of the following values is closest to the amount that Thorton should accept today for the right to his inheritance?
A) $373,108
B) $375,657
C) $665,500
D) $670,048

Question

Quizplus · Accepted Answer

To find the present value of the inheritance, we use the formula for the present value of a single future sum: $ PV = \frac{FV}{(1 + r)^n} $, where $PV$ is the present value, $FV$ is the future value, $r$ is the interest rate per period, and $n$ is the total number of periods. Given a 10% annual interest rate compounded semiannually, the semiannual rate is 5% or 0.05. Over three years, there are 6 periods (3 years * 2). Thus, the calculation is $ PV = \frac{500,000}{(1 + 0.05)^6} $, which is approximately $373,108.

Thorton Will Receive an Inheritance of $500,000 Three Years from Now