Question

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

Answer 1

Sell to ABC corporation.

Step-by-step explanation:

Here we have two options which is either sell the farm to ABC for $500,000 today or sell it to XYZ for $530000 receivable after a year.

Option 1. Selling to ABC

The amount received $500,000

Investing it at 10% $50,000

Total Value of Investment at year end $550,000

Now Option 2. Selling to XYZ

The amount received $530,000

Total Value of Investment at year end $530,000

As the benefit to sell ABC is more than XYZ corporation hence its better to sell the farm to ABC corporation.