Question

You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75%, which offer should you accept and why?

Answer 1

Hello there!

Answer: Receive the $189,000 today. It has a net value that's higher

The reason why you should receive the $189,000 today because it would have a net value that's higher than the second value.

When you get the $189,000, all of that money belongs to you, you don't have to worry about the discount rate of the property. The person that buys the property would be affected by the discount rate.

But for the second offer, you would apply the discount rate.

In the second offer, you're suppose to be getting $200,000. However, the discount rate will take away some of the money.

$200,000*0.0875=17,500\\\\200,000-17,500=182,500$

You would technically only get $182,000, meaning that you would be getting less than what you expected.

I hope this helps!

Best regards,

MasterInvestor