Question

Question 2 You are planning to sell your car. Your friend offers to buy your car with four, equal annual payments of $3,000 beginning two years from today. However, the car dealer offers $7,000 for the car today. Assuming that you can invest at 10%, should you take the dealer’s offer or sell it to your friend (assuming that your friend keeps his word and he will pay you)?

Answer #1

Present value of friend offer is:

Year | Cash flow | Discount factor | Present value |

1 | 0.909091 | - | |

2 | 0.826446 | - | |

3 | 3,000 | 0.751315 | 2,253.94 |

4 | 3,000 | 0.683013 | 2,049.04 |

5 | 3,000 | 0.620921 | 1,862.76 |

6 | 3,000 | 0.564474 | 1,693.42 |

Present value | 7,859.17 |

As present value of friend offer is more than dealer offer of $7,000, friend's offer is accepted

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