Question

. . You have a debt with two payment options. Option 1 is to pay $3000 in one year from today, $5,000 in two years from today, and $8,000 in three years from today. Option 2 is to pay $15,000 today. Demonstrate which is the better option for you if money is worth 5.00 % p.a. simple interest. Don’t forget to state which is the better option for you ( 10 points) show your caculation by BAII plus caculator.You are encouraged to draw the timelines for yourself to help you with setting up the logic of how to solve the problem.

Answer 1

To sole this proble we have to eleborate both options under simple interest -

Calculation under Option 1

Year	Option 1	Cumulative	Int 5% PA
Year 1	3000	3000	0
Year 2	5000	8000	150
Year 3	8000	16000	400
Total	16000		550

Total Cost with interest (16000+550) = 16550

(Every year amount paid at the end of year hence zero interest is calculated on amount paid in respective year and for next year ot is calculated @5%)

Calculation under Option 2

Year	Option 2	Int 5% PA
Year 1	15000	750
Year 2		750
Year 3		750
Total	15000	2250

Total Cost with interest (15000+2250) = 17250

Based on above working it is recommended to pay debt based on Option 1