Question

Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent from Dr. Bob for the next 10 years. The farmer has offered to pay $20,000 today or an annuity of $3,200 at the end of each of the next 10 years. Which pay-ment method should Dr. Jackson accept if his required rate of return is 10 percent

Answer 1

Dr. Jackson should accept the $20,000 paid today

Step-by-step explanation:

you must analyse the present value of both payment options:

• the present value of the $20,000 paid today is exactly $20,000
• the present value of the annuity = $3,200 x 6.1446 (PV annuity factor, 10%, 10 periods) = $19,662.72

Since the present value of the immediate cash payment is higher than the annuity payment, Bob should choose that offer.