stuck on math question

dmillionaire

New member
Joined
Sep 15, 2013
Messages
49
23. The owner of a residential building lot has received two purchase offers. Mrs. A is offering a $20,000 down payment plus $40,000 payable in 1 year. Mr. B's offer is $15,000 down plus two $25,000 payments due one and two years from now. Which offer has the greater economic value if money can earn 9.5% compounded quarterly? How much more is it worth in current dollars?

so i'm kinda stuck on this question

i was trying for mrs.a

i = 9.5 / 2 = 2.375 = 0.02375%

n = 1 x 4 = 4

40 000 ( 1 + 0.02375) ^4 = 43937.53 + 20 000

= 63 937.53



i did about the same thing for mrs.b and im getting a difference of around 8000 , 9000 but i have the answer and the answer is

ANS: Mr. B's offer should be accepted since its current economic value is $2064.20 greater

need some help finding that answer , studying for a test at the moment
 

JeffM

Elite Member
Joined
Sep 14, 2012
Messages
3,832
23. The owner of a residential building lot has received two purchase offers. Mrs. A is offering a $20,000 down payment plus $40,000 payable in 1 year. Mr. B's offer is $15,000 down plus two $25,000 payments due one and two years from now. Which offer has the greater economic value if money can earn 9.5% compounded quarterly? How much more is it worth in current dollars?

so i'm kinda stuck on this question

i was trying for mrs.a

i = 9.5 / 2 = 2.375 = 0.02375%

What you mean is i = 9.5% / 4 = 2.375% = 0.02375.

n = 1 x 4 = 4

40 000 ( 1 + 0.02375) ^4 = 43937.53 + 20 000

The problem asks you to find the answer by comparing present values, but you could get the same answer by comparing future values. But you must be consistent: compare apples and apples or oranges and oranges. Your equation above does neither. You are calculating the future value of 40,000 one year from receipt when you will not receive the 40,000 until a year from now. And you are adding that meaningless number to the present value now of an immediate payment of 20,000.

Present value calculations

\(\displaystyle \dfrac{40,000}{(1 + 0.02375)^4} + \dfrac{20,000}{(1 + 0.02375)^0} \approx 36,415.34 + 20,000 = 56,415.34.\)

\(\displaystyle \dfrac{25,000}{(1 + 0.02375)^8} + \dfrac{25,000}{(1 + 0.02375)^4} + \dfrac{15,000}{(1 + 0.02375)^0} \approx 20,719.95 + 22759.59 + 15,000 = 58,479.54.\)

\(\displaystyle 58,479.54 - 56,415.34 = 2,064.20.\)


i did about the same thing for mrs.b and im getting a difference of around 8000 , 9000 but i have the answer and the answer is

ANS: Mr. B's offer should be accepted since its current economic value is $2064.20 greater

need some help finding that answer , studying for a test at the moment
.
 

dmillionaire

New member
Joined
Sep 15, 2013
Messages
49
Top