Thorton will receive an inheritance of £500,000 three years from now.Thorton's discount rate is 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?

Question

Quizplus · Accepted Answer

Using the formula for present value of a future lump sum with semiannual compounding: 
PV = FV / (1 + r)^(n*2)
where PV = present value, FV = future value, r = discount rate per period, and n = number of periods.

PV = £500,000 / (1 + 0.05)^(3*2) = £373,108 (rounded to nearest pound)

Therefore, Thorton should accept approximately £373,108 today for the right to his inheritance.

Thorton Will Receive an Inheritance of £500,000 Three Years from Now.Thorton's