Question

A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a discount of 8% from the purchase price. Assume the product sells for $100.

a-1. Calculate the present value of the payments if you can borrow or lend funds at an interest rate of 5 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a-2 Which is a better deal?

b-1. Calculate the present value if the payments on the 4-year installment plan do not start for a full year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-2. Which is a better deal?

Answer 1

A-1)

Under 3years installment plan :-

PV of bill amount = 250 + 250 * ( 1 - ( 1 + i)^-n ) / i

= 250 + 250 * ( 1 - ( 1.05)^-3) / 0.05

= 250 + 250 * 2.723248029

PV of bill amount under 3 years installment plan = $ 930.81

If you pay bill immediately than you will get 8% discount.

Amount of bill pay if you pay immediately = $ 1000 - 1000* 8% = $ 1000 - 80 = $ 920.

a-2) Pay bill immediately is better option or deal.

b-1)

Under 4 years installment plan :-

PV of bill amount = 250 * ( 1 - ( 1 + i)^-n ) / i

=250 * ( 1 - ( 1.05)^-4) / 0.05

= 250 * 3.5459505042

PV of bill amount under 3 years installment plan = $ 886.49

If you pay bill immediately than you will get 8% discount.

Amount of bill pay if you pay immediately = $ 1000 - 1000* 8% = $ 1000 - 80 = $ 920.

b-2) Pay bill 4 years installment is better option or deal.