Question

Sam is selling a business. she has 2 offers to consider. current simple interest rates are 4%. offer1: 1000000 payble today and 500000 payble in 1 year. offer 2: 500000payble today and 250000 payble in 3 years. What is the current economic value of both the offers.

Answer 1

The current economic value of Offer 1 is $961,538.46, and the current economic value of Offer 2 is $942,675.21.

Step-by-step explanation:

Sam needs to evaluate the present worth of both offers by discounting future payments at the prevailing interest rate. For Offer 1, the payment of $500,000 in one year is discounted using the formula for present value:
`\[PV = (FV)/((1 + r)^n)\],` where
`\(FV\)` is the future value,
`\(r\)` is the interest rate, and
`\(n\)` is the number of years. Plugging in the values,
`\[PV_1 = (500,000)/((1 + 0.04)^1) = \$480,769.23\]`. Adding the present value of the initial payment,
`\[PV_{\text{Offer 1}} = 1,000,000 + 480,769.23 = \$1,480,769.23\].`

Similarly, for Offer 2, the payment of $250,000 in three years is discounted:
`\[PV_2 = (250,000)/((1 + 0.04)^3) = \$229,905.98\].`Adding the present value of the initial payment,
`\[PV_{\text{Offer 2}} = 500,000 + 229,905.98 = \$729,905.98\].`

Therefore, the current economic value of Offer 1 is
`\$1,480,769.23`, and the current economic value of Offer 2 is
`\$729,905.98.` Comparing the two, Sam should choose Offer 1, as it has a higher current economic value, providing a better financial outcome when considering the time value of money.