Business Mathematics 114. Q4P4Q2

Question

Annette is considering two offers on her house in Rutland. The first offer is $400861.24 which includes 10% down, 45% to be paid in 1 year and the remainder to be paid in 2.5 years. The second offer is for $378334.52 with 50% down and the remainder to be repaid in 1 year. The rate of interest is 4.82% per year compounded monthly.

What is the value today of Annette's second offer?

Answer 1

The 2nd offer is worth 352638.74 based on NPV of two payments one at close and in yr 1. It is less than the other offer which is worth 359,051.76 which has 10% down then one payment in Yr 1 and second payment in Yr2.

What you need to do is lay out the cashflows as below then use the NPV formula to discount the cash flows by the stated interest rate

If you want to do it manually you need to discount the Yr cash flow by dividing it by 1.0482. The second payment you need to calculate the factor by elevating the rate to the 2.5 power (1+ 4.82%)^(2.5)