Respuesta :
Question
Business A business wants to buy a parcel of land in order to expand its operati
The owner of the land offers two purchase options: Buy the land today for $100,000
, or
buy the land in five equal payments
of $22,000 where the payments are due a year
apart
and the first payment is due immediately.
The chief
financial officer for the
business
determines that money set aside for the purchase
of the
land can be
invested and
earn
5.4% interest annually. Which purchase option
is the better
deal for the
business?
Explain.
Calculating the PV for Option 2 will allow us to compare it to the $100,000 cost of Option 1. The option with the lower present value is the better deal for the business because it represents a lower cost in today’s dollars. To complete the comparison, you would calculate the PV for Option 2 and then compare it to the $100,000 figure from Option 1. If the PV of Option 2 is less than $100,000, then paying in installments is the better deal; if it’s more, buying the land outright is better.
