Question
. Richard Simons is selling his house. He has a choice of taking $125,000 today or $135,000 in 6 months. If he takes the money today, he can invest it at Valley Bank at 5% interest compounded monthly.How much would the 125,000 be worth in six months if invested?Which offer should he take? Why? How much more money does he gain in
making this choice?
making this choice?
Answers
Reiny
value of 125000 6 months from now
= 125000(1.00416666...)^6
= 128157.73
Pr value of 135000
x(1.00416666..)^6 = 135000
x = 131673.68
So both solutions show that he should take the 135000 six months from now.
At he present time, the difference is worth
= 131673.68 - 125000
$ 6673.68
Six months from now the difference is worth
135000 - 128157.73 =6842.27
notice that
6673.68(1.00416666..)^6 = 6842.27
= 125000(1.00416666...)^6
= 128157.73
Pr value of 135000
x(1.00416666..)^6 = 135000
x = 131673.68
So both solutions show that he should take the 135000 six months from now.
At he present time, the difference is worth
= 131673.68 - 125000
$ 6673.68
Six months from now the difference is worth
135000 - 128157.73 =6842.27
notice that
6673.68(1.00416666..)^6 = 6842.27