Question

A company owns a plot of land on which buried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, the company wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $750,000 for the land now, and Buyer B, who is willing to make 23 annual payments of $87,000 each, with the first payment to be made 8 years from today. Assuming that the appropriate rate of interest is 8%.

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Calculate the present value for each of the buyer. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

	Buyer A	Buyer B
Present value of purchase price	$	$

To whom should they sell the land?

Answer 1

$750,000 1 Buyer A: 2 Present value of purchase price 3 4 Buyer B: 5 Annual payment, PMT 6 Number of payments, NPER 7 Rate of interest, RATE 8 PVAF for 23 years @ 8% PVAF for 23 years @ 8% 9 (Rounded to 5 decimal places) 10 Present value of the payments 8 years from now $87,000 231 8% 10.371058951 10.37106 $902,282 12 PVF for 8th year @ 8% 0.540268885 PVF for Sth year @ 8% 13 (Rounded to 5 decimal places) 0.540271 14 Present value of purchase price S487,476 15 16 Buyer A Buyer B 17 Present value of purchase price $750,000 $487,476 18 They should sell the land to Buyer A as the present value of purhcase price is 19 higher in his/her case. Calculations are shown below: A 1 Buyer A: 2 Present value of purchase price 750000 4 Buyer B: 5 Annual payment, PMT 6 Number of payments, NPER 7 Rate of interest, RATE 8 PVAF for 23 years @ 8% PVAF for 23 years @ 8% 9 (Rounded to 5 decimal places) 10 Present value of the payments 8 years from now 87000 23 0.08 =PVB7,B6,-1,0,0) =ROUND(B8,5) =B5*B9 =PVB7,8,0,-1,0) 12 PVF for 8th year @ 8% PVF for 8th year @ 8% 13 (Rounded to 5 decimal places) 14 Present value of purchase price =ROUND(B12,5) =B10*B13 LR2 Buyer A Buyer A -14 Buyer B Buyer B 17 Present value of purchase price =B2 =B14 18 They should sell the land to Buyer A as the present value of purhcase price is higher in 19 his/her case.