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10 October, 04:43

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?

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  1. 10 October, 06:49
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    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
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