Gina Vitale has just contracted to sell a small parcel of land that she inherite

Question

Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 at the closing of the transaction or will pay the amounts shown in the following table at the beginning of each of the next 5 years. Because Gina doesn't really need the money today, she plans to let it accumulate in account that earns 7% annual interest. Given her desire to buy a house at the end of 5 years after closing on the sale of the lot, she decides to choose the payment alternative - $24,000 single amount or the mixed stream of payments in the following table- that provides the higher future value at the end of 5 years. Which alternative will she choose? Mixed stream - Beginning of year 1 - 2000 cash flow, beginning of year 2 - 4000 cash flow, beginning of year 3 - 6000 cash flow, beginning of year 4 - 8000 cash flow, beginning of year 5 - 10000 cash flow.

Explanation / Answer

Even though the total they will pay her is actually $30,000, she would really be better of taking the $24,000 and investing it with compounding interest. That way she will finish up with over $36,000 so $6000 better off taking the cash outright.

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