Question

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?

Answer 1

Answer:

We should accept offer 2 because the amount today is higher than offer 1.  

(offer 1 is $89,500, offer 2 is 91305)

Explanation:

To get the right answer we have to compare the 2 offers in the same moment of time.  We use interest formula to bring the future amount to this moment.  

First offer is for $89,500 today

Second offer is $35,000 today and $70,000 in two years  discount rate is 11.5.

The formula of interest is A=P (1+r)ⁿ

A=Final amount  

P= Principal ( deposit)  

r= interest rate

n= time

We know A, r and n

Looking for P,

then  P= A/(1+r)ⁿ

P= 70000/(1+0,115)² =56305

Offer 2 is =35000+56305=91305