Simon Shansky is about to sell his shares in a private corporation for $100,000. He has owned the shares for many years, having originally acquired them at a cost of $20,000. Shansky intends to invest the proceeds from the sale in interest-bearing securities yielding 10%.

Two potential purchasers have made offers on the shares. One purchaser has offered to pay the full purchase price in cash. The other has offered to pay $40,000 at the date of sale and the balance of $60,000 in three annual instalments of $20,000, plus interest of 10% on the unpaid balance. The unpaid balance would be secured with adequate collateral.

Shansky is subject to a 45% tax rate.

Required:

1. Which option should Shansky accept?

2. Calculate the amount of funds that Shansky will have after three years under each option.

3. What rate of return would have to be earned on the invested proceeds of sale under the full cash payment option to provide the same capital value as under the deferred payment option after three years?

4. Indicate, without providing detailed calculations, whether your answer to question 2 would be different if Shansky were selling a building for $100,000 that originally cost $80,000 and had an unamortized capital cost of $35,000.