Question

On a cash basis and with money worth 8% simple interest. Which of the following piece of property is the better and by how much ?
•A’s offer is $3000 cash and an additional $1000 in 8 months .
• B’s offer is $5,250 cash and an additional $500 in 18 months .

Answer 1

Present Value Method

B's offer is better by $1,724.19

A's Offer:

$3,000 + $1,000 x 1 / [(1+(8%*8/12))(8/12)]

$3,000 + $1,000 x 1 / 1.0352

$3,000 + $965.95

$3,965.95

B's Offer:

$5,250 + $500 x 1 / [(1+(8%*18/12))(18/12)]

$5,250 + $500 x 1 / 1.1853

$5,250 + $421.835

$5,671.835

Future Value Method (at end of 18 months)

B's offer is better by $2,111.67

A's Offer:

$3,000 x (1+(8%*18/12))(8/12) + $1,000 x (1+(8%*10/12))(10/12)

$3,555.89 + $1,055.26

$4,611.15

B's Offer:

$5,250 x (1+(8%*18/12))(8/12) + $500

$6,222.81 + $500

$6,722.81