Dalya is considering two offers on a property that she is willing to sell. Mr.Wangs offer is $65000 payable immediately. Ms.Macrae's offer is for $13,000 down and $58000 payable in two years.
a) Which offer has the greater economic value if Dalya can earn 7.50% compounded monthly on funds during this time?
the answer for this is MR.WANG'S OFFER
b) In current dollars, how much more is this offer worth?
the answer is $2056
i don't understand how to find tthat answer.i tried some ways but it comes differnt answer that i dnt get it.plz help.
The present value of Mr. Wang's offer is
$65000
the present value of Ms Macrae's offer is
13000 + 5800(1.00625)^-24 = 62944.37
the difference between the two values is
$2055.63
looks like they rounded to the nearest dollar.
THANKS!!! it is right. these maths are so hard. that i wanted to practice before the test on monday. Thanks, u saved the day!!! :D
For these type of question, my students always had to make a "time graph"
Then you decide on a fixed date, in this case "now", and move each money entry to that fixed date, either forward or backwards using the formula
principal(1+i)^n
if n is positive the money would move to the right
if n is negative the money would move to the left.
To determine which offer has the greater economic value, we need to calculate the future value of both offers using compound interest.
For Offer 1 (Mr. Wang's offer), the amount is $65,000 payable immediately. Since there is no time involved, the future value of this offer remains $65,000.
For Offer 2 (Ms. Macrae's offer), the amount is $13,000 payable immediately and $58,000 payable in two years. The $13,000 payment made immediately does not change. However, we need to calculate the future value of the $58,000 payment after two years.
To calculate the future value of this payment using compound interest, we can use the formula for compound interest:
FV = PV × (1 + r/n)^(nt)
Where:
- FV is the future value
- PV is the present value
- r is the interest rate (in decimal form)
- n is the number of times interest is compounded per year
- t is the number of years
In this case, the interest rate is 7.50% (0.075) compounded monthly (n=12) and the time is two years (t=2).
Plugging in the values, we get:
FV = $58,000 × (1 + 0.075/12)^(12×2)
FV = $58,000 × (1 + 0.00625)^(24)
FV = $58,000 × 1.155291...
Rounding the future value to the nearest dollar, we get:
FV ≈ $66,984
Therefore, Offer 2 (Ms. Macrae's offer) has a future value of approximately $66,984.
Since the future value of Offer 1 (Mr. Wang's offer) is $65,000 and the future value of Offer 2 (Ms. Macrae's offer) is $66,984, we can conclude that Mr. Wang's offer (Offer 1) has a greater economic value.
Now, to find out how much more Offer 1 is worth than Offer 2 in current dollars, we can subtract the present values of the two offers:
Difference = PV(Offer 1) - PV(Offer 2)
Difference = $65,000 - $13,000
Difference = $52,000
Therefore, Mr. Wang's offer (Offer 1) is worth $52,000 more than Ms. Macrae's offer (Offer 2) in current dollars.