Question

A person can purchase a lot for $200,000 cash today.

Alternatively, they can pay $50,000 today, $60,000 in one year and
$120,000 in two years. What is the present value of the second
option if the int

Answer 1

To calculate the present value of the second option, we need to discount each cash flow back to the present using an appropriate discount rate. Assuming the discount rate is given, we can proceed with the calculation.

Given: Option 1: Purchase price of the lot = $200,000 (paid today) Option 2: Payment schedule = $50,000 today, $60,000 in one year, $120,000 in two years

To calculate the present value of the second option, we will discount each cash flow using the appropriate discount rate.

Discount rate = Int (interest rate) (not provided in the question)

Let's assume the discount rate is 8% or 0.08 (as a decimal).

(a) Calculate the present value of each cash flow in option 2:

PV1 = $50,000 / (1 + 0.08)^1 PV1 = $50,000 / 1.08 PV1 = $46,296.30 (rounded to the nearest cent)

PV2 = $60,000 / (1 + 0.08)^2 PV2 = $60,000 / 1.1664 PV2 = $51,495.02 (rounded to the nearest cent)

PV3 = $120,000 / (1 + 0.08)^2 PV3 = $120,000 / 1.1664 PV3 = $102,990.04 (rounded to the nearest cent)

(b) Calculate the present value of the second option:

PV(option 2) = PV1 + PV2 + PV3 PV(option 2) = $46,296.30 + $51,495.02 + $102,990.04 PV(option 2) = $200,781.36

The present value of the second option, considering the given discount rate of 8%, is approximately $200,781.36.

Please note that if a different interest rate (discount rate) is provided, the present value calculation will vary accordingly.