(10 pts) Barley Company owns a plot of land on which buried toxic wastes have been...

(10 pts) Barley Company owns a plot of land on which buried 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, Barley wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $350,000 for the land two years from now, and Buyer B, who is willing to make 12 annual payments of $50,000 each, with the first payment to be made 4 years from today. Assuming that the appropriate rate of interest is 9%:

What is the present value of Buyer A’s offer? $ __________

What is the present value of Buyer B’s offer? $ __________

Expert Solution

Present Value of A's offer = $350,000 * PVF(9%,2 years) = $350,000 * (1/(1.09)^2) = $350,000*0.84168 = $294,588

Present Value of B's offer = $276,470 (Refer Note below)

(Assumed annual payment is made at year end)

Note :

Calculation of Present Value of B's offer :

Year	Annual Payment	PVF@9%	Present Value
1	0	0.917431193	-
2	0	0.841679993	-
3	0	0.77218348	-
4	50000	0.708425211	35,421
5	50000	0.649931386	32,497
6	50000	0.596267327	29,813
7	50000	0.547034245	27,352
8	50000	0.50186628	25,093
9	50000	0.46042778	23,021
10	50000	0.422410807	21,121
11	50000	0.38753285	19,377
12	50000	0.355534725	17,777
13	50000	0.326178647	16,309
14	50000	0.299246465	14,962
15	50000	0.274538041	13,727
		*Present Value*	*2,76,470*

ekkarill92 answered 1 year ago

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