Would you be willing to pay $500 today in exchange for $10,000 in 30 years?
No. At age 76, I won't be alive in 30 years.
What about you?
Let's see what rate of interest we would get.
500(1+i)^30 = 10000
1+i = 20^(1/30) = 1.105
10.5% interest is this day and age?
YUP, I would go for it, leave it as an inheritance since, like Ms Sue, I probably wouldn't be around to collect it.
or
If I make it I would be 100. What a party we could have!
To determine if paying $500 today in exchange for $10,000 in 30 years is a good deal, we can calculate the present value of the future amount and compare it to the initial payment.
To calculate the present value, we need to use a formula called the present value (PV) formula. The formula is:
PV = FV / (1 + r)^n
Where:
PV = Present Value (the amount we want to calculate)
FV = Future Value (the amount we want in the future)
r = Interest Rate per period
n = Number of periods
In this case, the future value is $10,000, the interest rate is unknown, and the number of periods is 30 years.
Since we don't have the interest rate, we cannot directly calculate the present value. However, we can estimate the interest rate required to make it a good deal by rearranging the formula:
r = (FV / PV)^(1/n) - 1
Let's plug in the values for the future value, present value, and number of periods:
r = ($10,000 / $500)^(1/30) - 1
Calculating this, we find that the interest rate required for this investment to be a good deal is approximately 15.22%.
So, whether paying $500 today for $10,000 in 30 years is a good deal depends on the prevailing interest rates. If the interest rates available to you are lower than 15.22%, it could be considered a good deal. On the other hand, if the interest rates are higher, you may find more attractive investment options.