Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

Question

Quizplus · Accepted Answer

Farmer Jones should sell to ABC Corporation because the present value of XYZ Corporation's offer ($530,000 one year from now) discounted at 10% is less than $500,000. Additionally, the net profit from farming ($15,000) plus the present value of XYZ's offer is still less than $500,000.

Farmer Jones Bought His Farm for $75,000 in 1975