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 $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 the best offer, we need to calculate the net present value (NPV) of both offers using the given discount rate of 11.5%.

For the first offer, the NPV is simply the amount offered, which is $89,500.

For the second offer, we need to calculate the present value (PV) of both the initial payment ($35,000) and the future payment ($70,000) using the formula: PV = FV / (1 + r)^n, where r is the discount rate and n is the number of periods.

So, using n = 2 for the future payment, we get:
PV of initial payment = $35,000 / (1 + 0.115)^0 = $35,000
PV of future payment = $70,000 / (1 + 0.115)^2 = $53,729.02
Total PV of second offer = $35,000 + $53,729.02 = $88,729.02

Therefore, the second offer has a higher net present value than the first offer, so the best choice is to accept the second offer of $35,000 today and $70,000 two years from now.

You Have Some Property for Sale and Have Received Two