Gina Coulson has just contracted to sell a small parcel of land that she inherit

Question

Gina Coulson has just contracted to sell a small parcel of land that she inherited a few years a buyer is willing to pay $24,000 now.Alternatively,the buyer will make the series of payments sho the following table, with each payment made at the beginning of the year. Because Gina doesn't need the money today, she plans to let it accumulate in an account that earns 7% annual inte rest Beginning of Year (t) Cash Flow (CF) $2,000 4,000 6,000 8,000 0,000 a. What is the future value of the lump sum at the end of year 5? b. What is the future value of the mixed stream at the end of year 5 c. Based on your findings in parts (a) and (b), which alternative should Gina take?

Explanation / Answer

a) Ans:- Future value of lump sum at end of year 5 = $33,661.24

Calculation:-

Future value of lump sum = Present value of lump sum *(1+interest rate)years

                                                 =$24,000*(1+7%)5

                                                 = $33,661.24

Note:- Since the money is not needed today it will be deposited which will pay interest of 7% per annum.

b)Ans:- Future value of mixed stream =$35,257.75

Calculation:-

Future value = 2,000*(1.07)5+4,000*(1.07)4+6,000*(1.07)3+8,000*(1.07)2+10,000*(1.07)

Note:- Please note that cash are received at the beginning of each year

=2,805.103+5,243.184+7,350.258+9,159.20+10,700

=$35,257.75

c) Gina should take the mixed stream option i.e (b) , since the future value of cash flow is higher than option (a).

Please feel free to ask if you have any query in the comment section.

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