We appreciate your visit to Pete s Real Estate is currently valued at 71 000 Pete feels the value of his business will increase at a rate of 14 per. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
Pete should ask for a price higher than $76,000, such as $130,000 or $135,000, to ensure he gets a fair price for his business.
To determine the price Pete should ask for his business, we need to compare the future value of his business if he keeps it for 6 years with the present value of the competitor's offer of $76,000.
First, let's calculate the future value of Pete's business after 6 years using compound interest. We know that the business value is currently $71,000 and it will increase at a rate of 14% per year, compounded semiannually.
To calculate the future value, we use the formula:
Future Value = Present Value * (1 + (interest rate/compounding frequency))^(compounding frequency * number of years)
For Pete's business, the interest rate is 14% or 0.14, the compounding frequency is semiannual (twice a year), and the number of years is 6.
Future Value = $71,000 * (1 + (0.14/2))^(2 * 6)
Calculating this, we find that the future value of Pete's business after 6 years is $126,090.09.
Next, let's calculate the future value of $76,000 if Pete invests it at 8% compounded quarterly for 6 years.
Using the same formula, the interest rate is 8% or 0.08, the compounding frequency is quarterly (four times a year), and the number of years is 6.
Future Value = $76,000 * (1 + (0.08/4))^(4 * 6)
Calculating this, we find that the future value of $76,000 after 6 years is $113,447.44.
Since the future value of Pete's business after 6 years ($126,090.09) is higher than the future value of the competitor's offer ($113,447.44), Pete should ask for a higher price than $76,000.
Pete can consider asking for a price slightly above the future value of his business, such as $130,000 or $135,000, to ensure he gets a fair price for his business.
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