Suppose Carlos has a 60 percent chance of not collecting $100,000 when his rich uncle dies in 10 years.Juanita wants to buy the rights to this possible inheritance from Carlos.How much is the possible inheritance currently worth to Carlos? Assume the interest rate is 9 percent.

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Quizplus · Accepted Answer

The possible inheritance is worth $100,000 with a 40% chance (100% - 60% = 40%). To find the present value of this inheritance, we use the formula for present value: PV = FV / (1 + r)^n, where FV is the future value ($100,000), r is the interest rate (9% or 0.09), and n is the number of years (10). First, calculate the present value of the full $100,000, then multiply by the 40% chance. PV = $100,000 / (1 + 0.09)^10 = $100,000 / (1.09)^10 ≈ $42,240. Now, multiply by the 40% chance: $42,240 * 40% = $16,896.

Suppose Carlos Has a 60 Percent Chance of Not Collecting