Homework Answers
Evaluation of offer by friend or broker
Discount factor @18% for
Year 1 = 0.8475
Year 2 = 0.7182
Year 3 = 0.6086
Total annuity = 0.8475 + 0.7182 + 0.6086
= 2.1743
Total cash inflow = ($100,000 * Pv factor of year 1) + ($120,000 * Annuity factor for next 3 years)
= $ 100,000 + $ 260,916
= $ 360,916
The broker is ready to pay $ 400,000 today which is higher than $ 360,916 which is ready to be paid by friend. so the best option is sell to the broker.
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