Your company owns a large parcel of land in a neighboring city that you have no

Question

Your company owns a large parcel of land in a neighboring city that you have no use anymore. Two companies are interested in purchasing the land. Company A has offered you $20,000 per year for 20 years for the land. Company B offers that in addition to the 20 equal $20,000 payments, it can pay an additional $10,000 six years from now and an additional $15,000 16 years from now, if you agree to delay the start of the 20 equal $20,000 payments until three years from the date of agreement. Which offer should you take, if the interest rate is 15% (compounded annually).

Explanation / Answer

Option A:

Present Value of future annual payments =PV(0.15,20,20000) = $125,186.63

Option B

Present Value of future annual payments for three years = PV(0.15,20,20000)/(1.15^3) = $82,312.24

Present Value of $10,000 paid after 6 years = $4,323.28

Present Value of $15,000 paid after 15 years = $1,843.42

Net Present Value = $88,478.93

As Option A has higher Net Present Value we should go for option A

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