A house is on sale in Markham. Marlene has an option to pay $575 000 lump sum or pay $6000 at the end of every month for the next 10 years. If money earns 5% compounded monthly, which option has a better economic advantage?
A) Paying monthly has an advantage of $9312 in PV
B) Paying lump sum has an advantage of $9312 in PV
C) Paying monthly has an advantage of $85 129 in PV
D) Paying lump sum has an advantage of $85 129 in PV
E) Both options are the same. Choose any.

Question

Quizplus · Accepted Answer

We need to calculate the present value (PV) of both options to determine which one has a better economic advantage.

Option 1: Lump sum payment of $575,000
PV = $575,000

Option 2: Monthly payments of $6,000 for 10 years 
First, we need to calculate the monthly interest rate: 
i = 5% / 12 = 0.004167

Then, we can use the formula for present value of an annuity: 
PV = C * ((1 - (1 + i)^(-n)) / i)

where C = monthly payment, i = monthly interest rate, and n = number of months

Plugging in values, we get: 
PV = $6,000 * ((1 - (1 + 0.004167)^(-120)) / 0.004167) 
PV = $575,931.49

Therefore, the option with the better economic advantage is to pay monthly, with an advantage of $9312 in PV.

A House Is on Sale in Markham