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?

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