Econ 1202 help plz (1 Viewer)

[aanthnnyyy]

hey guys mainly just confused about the wording of the question:

A piece of land can be purchased by paying $50 000 cash or $20 000 deposit and two equal payments of $20 000 at the end of 2 years and 4 years respectively

- does two equal payments of 20,000 mean 10,000 @ end of year 2 and 10,000 @ end of year 4 or just 20,000 for yr2 and yr4? thanks

 

[EinstenICEBERG]

scenario 1: 50,000

scenario 2: 20,000 + 20,000 at end of year 2 + 20,000 at end of year 4

solutions:

Discount the two future payments to present values and add the deposit to arrive at a total present value of the second option.

PV = FV / (1+i)^n

PV = $20,000 / (1.08)^2
PV = $17,146.78

PV = $20,000 / (1.08)^4
PV = $14,700.60

$20,000 + $17,146.78 + $14,700.60 = $51,847.38

Comparing both options, it's apparent that paying $50,000 cash now is a wiser choice because it will generate a saving of $1,847.38