Question

You are buying a laptop and there is two payment plans to consider. Payment plan A is to pay $4,900 now and payment plan B is to pay $500 now and pay $210.30 per month for 30 months. Using an interest of 24%, which payment plan do you choose

Answer 1

Answer: Plan A has a lower present value and should be chosen.

Explanation:

Choose the one that has the lower present value because that means that it would be cheaper.

Present value of plan A = $4,900

Present value of plan B

= $500 + Present value of $210.30 per month for 30 months

$210.30 is constant so it is an annuity.

Periodic interest rate = 24%/12 = 2%

Present value of annuity = Annuity *  ( 1 - (1 + rate)^-number of periods) / rate

= 210.30 *  ( 1 - (1 + 2%)⁻³⁰) / 2%

= $4,709.97

Present value of plan B = 500 + 4,709.97

= $5,209.97

Choose Plan A because it has a lower present value.