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Question 1) A one bedroom unit in Darwin can be purchased now for $160,000 cash, or...
Question 1) A one bedroom unit in Darwin can be purchased now for $160,000 cash, or an $80,000 cash deposit today and $110,000 cash payable in five years. If interest rates are 9% p.a. compounding monthly, which method of payment is better? Explain.
Solutions
Expert Solution
$80,000 cash deposit today and $110,000 cash payable in five years is better.
| Present value of second option | = | Cash deposit today | + | Present value of $ 110,000 cash payable in 5 years | ||||
| = | $ 80,000.00 | + | $ 70,256.97 | |||||
| = | $ 1,50,256.97 | |||||||
| Present value of purchase now for $ 160,000 cash is more than second option. | ||||||||
| So, option to pay $ 80,000 cash today and $ 110,000 in five years is better. | ||||||||
| Working: | ||||||||
| Present value of 1 | = | (1+i)^-n | Where, | |||||
| = | (1+0.0075)^-60 | i | = | 9%/12 | = | 0.0075 | ||
| = | 0.638699699 | n | = | 5*12 | = | 60 | ||
| Present value of $ 110,000 cash payable in 5 years | = | Cash payable in 5 years | * | Present value of 1 | ||||
| = | $ 1,10,000.00 | * | 0.6386997 | |||||
| = | $ 70,256.97 | |||||||
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