Question

Question 1 Since she is moving to Bali after retirement, Ranjeeta decides to sell her house in Malaysia. The buyer is willing to pay RM300,400 today or alternatively he can pay RM60,000 in the first year, RM50,000 for the subsequent 4 years, and RM40,400 in the final year. These payments will be made at the beginning of each year. Ranjeeta is retiring in 6 years time. Because Ranjeeta does not really need the money today, she decides to let the payment(s) accumulate in a retirement account that earns 6% annual return. Which method of payment should she choose in order to get the highest value in her retirement account at the time of her retirement? Draw the timeline.

Answer 1

If Ranjeeta decides to receive annual payment each year, the present value of the payment is calculated as

  

RM50,000, RM50,000 RM50,000 RM50,000 RM40,000 Present value = RM60,000 + (1+0.06)* ' (1+0.06)2 ' (1+0.06)8' (1+0.06)*' (1+0.06)

Present value of the annual payments = RM263,145.6

Thus Ranjeeta should choose to receive RM 300,400 today because the present value of the amount received today is greater than the present value received over 6 years.

700000 2000 Timeline of the cash flows 60000 50000 50000 50000 50000 50000 40000 40000 30000 20000 10000 0 0 0 1 2 YEAR 3 4 5