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# Inheritance Decisions: Opportunity Cost

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Your uncle has given you three alternatives for your inheritance. You can have \$12,000 now; \$2,000 per year for the next eight years; or \$18,000 at the end of eight years. You assume your opportunity cost or discount rate is 12% annually. Which inheritance alternative would be best? Why?

(see details in attached file)

Consider the following project cash flows

Year Project A Project B
0 investment
outflow
-\$200

-\$300

1

60

200

2

70

100

3

80

100

4

80

The opportunity cost is 11%.
- Calculate the NPV of each project. Which project should be chosen?
- IRR. What are the internal rates of return on projects A and B?

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#### Solution Preview

Please see the attached files.

Your uncle has given you three alternatives for your inheritance. You can have \$12,000 now; \$2,000 per year for the next eight years; or \$18,000 at the end of eight years. You assume your opportunity cost or discount rate is 12% annually. Which inheritance alternative would be best? Why?

We need to find the present value of the three alternatives and choose the one with the highest present value.
Option 1 - \$12,000 now. Since the amount is being given now, the present value is \$12,000
Option 2 - \$2,000 ...

#### Solution Summary

The solution explains the calculation of present value and IRR and NPV of projects.

\$2.19