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Keith Vaughn is trying to sell a property in Alaska. Yesterday he was offered $10,000 for...

Keith Vaughn is trying to sell a property in Alaska. Yesterday he was offered $10,000 for the property. He was ready to accept the offer but another offer for $11,424 also came his way. The second offer is to be paid one year from now. Keith has satisfied himself that both buyers are safe and his deal will fall through. Which deal should Keith accept?

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Answer #1
There are two offers with different terms of payments. In this case, we can use the concept of the present value of money to compare both offers.
Amount receive in the first offer $        10,000
Present value of first offer $        10,000
Amount receive in the second offer (after one year) $        11,424
Multiply: Present value factor @12% for year 1 (1/1.12)          0.89286
Present value of second offer $        10,200
Keith should accept the second offer because the present value of the second offer is higher than the first offer.
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