Mr. & Mrs. Parsons are considering two offers to purchase their summer cottage. Offer A is for $200,000 consisting of an immediate $40,000 down payment with the $160,000 balance payable one year later. Offer B is for $196,500 made up of a $30,000 down payment and the $166,500 balance payable in six months.
a. If money can earn 4%, what is the current economic value of each offer?
b. Other things being equal, which offer should the Parsons accept? What is the economic advantage of the preferred offer over the other offer?
c. If money can earn 6%, which offer should the Parsons accept? What is the economic advantage of the preferred offer?