You are involved in a dispute over an inheritance. You believe you are entitled to $280,000 upon turning 21 years old. You will turn 21 in three years' time. Your older brother argues that you are actually entitled to nothing. You think that you have a good chance of prevailing and you suspect your brother knows that too. That is why he is offering to pay you $220,000 right now if you end the dispute and withdraw any further claim on the inheritance. If interest rates are 5 percent p.a., and assuming you would receive the full amount if you press on with the dispute, is your brother making a fair offer?

Select one:

a. His offer is more than fair. It is very generous. On a present value basis it far exceeds the $280,000 you will receive in three years' time.

b. Yes, his offer is fair. If you receive $220,000 now and invest it at 5 percent p.a. you will have at least $280,000 in three years' time.

c. His offer is neither fair nor unfair. His offer is exactly equal to the present value of $280,000 received in three years' time.

d. No. Your brother's offer is not fair. The present value of the full amount is $241,874.53, which is much more than his offer.