CFP® Practice Question: How To Analyze A Buyout Offer

Mary and Penny were equal partners in the ownership of a gift shop but after several disagreements, have decided to terminate the partnership. Mary offers to purchase Penny’s interest by paying either $20,000 today or $35,000 five years from today. If Penny’s opportunity cost is 12% annually, which of the following options should Penny choose?

A. Take the $20,000 because it is $140.06 greater than the present value of the $35,000 five years from now.

B. Accept the $35,000 because it is $15,000 more than $20,000.

C. Accept the $20,000 because there is some uncertainty that Mary will honor the agreement five years from now.

D. Accept the $35,000 because its present value today is greater than the $20,000 by $140.06.