You are the owner of an apartment building that is being offered for sale for $1,500,000. You receive an offer from a prospective buyer who wants to pay you $500,000 now, $500,000 in 6 months, and $500,000 in 1 year.
a. What is the actual present value of this offer, considering you can earn 12% interest compounded monthly on your money?
b. If another buyer offers to pay you $1,425,000 cash now, which is a better deal?
c. Because you understand the "time value of money" concept, you have negotiated a deal with the original buyer from part a, whereby you will accept the three-payment offer but will charge 12% interest, compounded monthly, on the two delayed payments. Calculate the total purchase price under this new arrangement.
d. Now, calculate the present value of the new deal, to verify that you will receive the original asking price of $1,500,000 for your apartment building.
Explain how the answers where worked out.