Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information re
1 answer:
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Answer:
a-1) Present value of the instalment option = $93.08
Present value of paying the bill immediately =$90
a2) Paying the bill immediately is the better deal
b-1) Present value of the instalment option = $88.65
b-2) Paying in instalments in this case is the better deal
Explanation:
a-1) Calculate Present value of the instalment option
The payments are spread out as follows: $25 immediately, and 25 at the end of each of the following 3 years, this is an annuity due where the present value is calculated as follows:
PMT = the annuity payment at the beginning of each period=$25
i = interest rate per period that would be compounded for each period
=0.05
n = number of payment periods=4
Present value = =$93.08
Present value of paying the bill immediately= $100 less the 10% discount= $100*0.9 = $90
a-2)Paying the bill immediately is the better deal as it has a lower cost of $90 compared to paying in instalments which a present value cost of $93.08
b1) If the payments on the 4-year instalment plan do not start for a full year, then the present value of the payment stream is calculated as follows:
=
= = 88.65
b-2) paying in instalments in this case is the better deal as it has a lower cost of $88.65 compared to paying the bill immediately which has present value cost of $90.