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8 July, 23:33

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?

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  1. 9 July, 00:34
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    Sell to ABC corporation.

    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.
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