Westwood Homes Is Beginning Work on Its Future College Park

question 145

Essay

Westwood Homes is beginning work on its future College Park sub-division. Westwood is now pre-selling homes that will be ready for occupancy in nine months. Westwood is offering $5,000 off the $295,000 selling price to anyone making an immediate $130,000 down payment (with the balance due in nine months.) The alternative is a $5,000 deposit with the $290,000 balance due in nine months. Mr. and Mrs. Symbaluk are trying to decide which option to choose. They currently earn 4.8% on low-risk short-term investments.
a) What is the current economic cost of buying on the $130,000-down $5,000-off option?
b) What is the current economic cost of buying on the $5,000-deposit full-price option?
c) Which alternative should the Symbaluks choose? In current dollars, what is the economic advantage of the preferred alternative?

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Definitions:

Marginal Utility Function

A mathematical representation that describes how the utility or satisfaction derived from consuming an additional unit of a good changes as more of the good is consumed.

Utility Function

A utility function is a mathematical representation of a consumer's preference ranking for different bundles of goods, showing the level of satisfaction for each.

Wealth

A substantial amount of monetary assets or physical valuables that are capable of being changed into a format usable for trading purposes.

Utility Function

A mathematical representation of how a consumer ranks different bundles of goods according to their level of satisfaction or utility.