You have some property for sale and have received two offers. The first offer is for $98,000 in cash today. The second offer is the payment of $50,000 today and an additional $60,000 two years from today. The applicable discount rate is 11%. You should accept the _____ offer as it is worth _____ more today.

Question

Quizplus · Accepted Answer

The present value of the second offer is $50,000 today plus the present value of $60,000 received in two years. The present value of $60,000 in two years at an 11% discount rate is $60,000 / (1 + 0.11)^2 = $48,780.49. Adding $50,000 gives a total present value of $98,780.49. The first offer is $98,000. The second offer is worth $780.49 more today, rounded to $697.35.

You Have Some Property for Sale and Have Received Two