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 5% from the purchase price. Assume the product sells for $100.

1. Calculate the present value of the payments if you can borrow or lend funds at an interest rate of 3 percent.

PV of installment plan:$ _________________

a. Which is a better deal:

Installment plan or pay in full?

3. Calculate the present value if the payments on the 4-year installment plan do not start for a full year.

PV of installment plan: $________

a. which is a better deal?

Installment plan or pay in full?

Answer 1

1-
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =3%
0	25	25
1	25	24.27184466
2	25	23.56489773
3	25	24.27184466
present value of payment		97.10858705
value of instant payment after discount	price*(1-discount rate)	95
it is better to pay It now as value of present payment is less than the present value of 3 years installment payment
2-
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =3%
1	25	24.27184466
2	25	23.56489773
3	25	22.87854148
4	25	22.2121762
present value of payment		92.92746007
value of instant payment after discount	price*(1-discount rate)	95
it is better to in installment of 4 year   value of present payment is greater than the present value of 4 years installment payment