Question

A construction company borrow $30,000 to purchase a truck. The bank has offered the following choice of payment plans. If the interest rate is 15%, which plan the company should choose? Use present worth analysis

Plan A: $5010 per year for 5 years

Plan B: No payment for first 2 years, then $9048 per year for rest of 3 years

Answer 1

Here, the construction company has two options.

for present worth analysis, we have a formula as:

the company has option to pay $5010 per year for 5 years, value for which can be calculates as:

and the company has another option for no payment for first 2 years, then $9048 per year for rest of 3 years, value for which can be calculaed as:

thus, the company go with option one i.e. $5010 per year for 5 years, because in this plan the company have to pay the lesser amount then plan two.