Question

Your firm is considering the purchase of a new office phone system. You can either pay $ 32000 ​now, or $ 950 per month for 46 months.

a. Suppose your firm currently borrows at a rate of 6 % per year​ (APR with monthly​ compounding). Which payment plan is more​ attractive?

b. Suppose your firm currently borrows at a rate of 17 % per year​ (APR with monthly​ compounding). Which payment plan would be more attractive in this​ case?

Answer 1

The question is solved by comparing the present values of the three options.

a.Information provided:

Monthly payment= $950

Time= 46 months

Interest rate= 6%/12= 0.50% per month

Enter the below in a financial calculator to compute the present value:

PMT= 950

I/Y= 0.50

N= 46

Press the CPT key and PV to compute the present value.

The value obtained is 38,952.08.

Therefore, the present value of the 1st option is $38,952.08.

b.Information provided:

Monthly payment= $950

Time= 46 months

Interest rate= 17%/12= 1.4167% per month

Enter the below in a financial calculator to compute the present value:

PMT= 950

I/Y= 1.4167

N= 46

Press the CPT key and PV to compute the present value.

The value obtained is 31,949.16.

Therefore, the present value of the second option is $31,949.16.

The payment plan having an interest rate of 6% is the best since it has the highest present value.