Westwood Homes is beginning work on its future College Park subdivision. Westwoo

Question

Westwood Homes is beginning work on its future College Park subdivision. 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 9 months). The alternative is a $5000 deposit with the $290,000 balance due in 9 months. Mr. and Mrs. Symbaluk are trying to decide which option to choose. They currently earn 4.8% on low-risk short-term investments.

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

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

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

Explanation / Answer

with option A the net present value will be 261596.23 and with option B the NPV will be 236290.35 hence option B preffered

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