Carey Company owns a plot of land on which burried toxic wastes have been discov
ID: 2447686 • Letter: C
Question
Carey Company owns a plot of land on which burried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, Carey wishes to sell the land now. It has located two potenital buyers. Buyer A, who is willing to pay $850,000 for the land now, or Buyer B, who is willing to make 20 annual payments of $90,000, with the first payment to be made at the end of the year. Assuming that the appropraite rate of interest is 9%, wo whom should Carey sell the land. Show calculations.
Explanation / Answer
Carey Company should sell the land to Buyer A.
Buyer A is willing to pay $850,000 now and the interest rate is 9%. If carey company wish to invest the amount for the 20 years the total rerurn after 20 years would be
= 850000 (1 + 0.09/1)20*1
= 850000 (1 + 0.09)20
= 850000 (1.09)20
= 850000 (5.60)
= $4,760,000
If Carey sales the land to B, who is willing to pay $90000 annual payment the total return at the end of 20 years would be = $4,604,410
Year Opening Balance Installment Interest Closing Balance 1 0.00 90000.00 0.00 90000.00 2 90000.00 90000.00 8100.00 188100.00 3 188100.00 90000.00 16929.00 295029.00 4 295029.00 90000.00 26552.61 411581.61 5 411581.61 90000.00 37042.34 538623.95 6 538623.95 90000.00 48476.16 677100.11 7 677100.11 90000.00 60939.01 828039.12 8 828039.12 90000.00 74523.52 992562.64 9 992562.64 90000.00 89330.64 1171893.28 10 1171893.28 90000.00 105470.40 1367363.67 11 1367363.67 90000.00 123062.73 1580426.41 12 1580426.41 90000.00 142238.38 1812664.78 13 1812664.78 90000.00 163139.83 2065804.61 14 2065804.61 90000.00 185922.42 2341727.03 15 2341727.03 90000.00 210755.43 2642482.46 16 2642482.46 90000.00 237823.42 2970305.88 17 2970305.88 90000.00 267327.53 3327633.41 18 3327633.41 90000.00 299487.01 3717120.42 19 3717120.42 90000.00 334540.84 4141661.25 20 4141661.25 90000.00 372749.51 4604410.77