You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

Question

Quizplus · Accepted Answer

To determine which offer is better, we need to find their net present value (NPV) and choose the higher one.

For the first offer, the NPV is simply the cash amount offered:

NPV1 = $89,500

For the second offer, we need to discount the future payment of $70,000 back to present value:

NPV2 = $35,000 + $70,000 / (1 + 0.115)² 
NPV2 = $35,000 + $53,505.70 
NPV2 = $88,505.70

Comparing the two offers, we see that the second offer has a higher NPV, so we should accept it. This means we will receive more cash in today's dollars.

You Have Some Property for Sale and Have Received Two