Westwood Homes is beginning work on its future College Park sub-division. Westwo

Question

Westwood Homes is beginning work on its future College Park sub-division. Westwood is now pre-selling homes that will be ready for occupancy in nine months. Westwood is offering $5000 off the $295,000 selling price to anyone making an immediate $130,000 down payment (with the balance due in nine months.) The alternative is a $5000 deposit with the $290,000 balance due in nine months. Mr. and Mrs. Symbaluk are trying to decide which option to choose. They currently earn 4.8% on low-risk short-term investments.

What is the current economic cost of buying on the $130,000-down $5000-off option?

What is the current economic cost of buying on the $5000-deposit full-price option?

Which alternative should the Symbaluks choose? In current dollars, what is the economic advantage of the preferred alternative?

Explanation / Answer

1)Current Economic cost of BUying an $130,000-down $5000-off option:

Interest on $130,000 for 9 months = $130,000*4.8% * 9/12 = $4680.

Discount given = $5000.

Current Economic Net Benefit = $5000-$4680 = $320

2)

Current economic cost of buying on the $5000-deposit full-price option:

Interest on $5,000 for 9 months = $5,000*4.8% * 9/12 = $180.

Current economic cost is $180.

Alternative 1 that is accepting a discount of $5000 by downpaying $130,000 as it leads to an advantage of $180+$320 = $500.

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