Question

Your auto dealer gives you the choice to pay $15,000 cash now, or make three payments: $8,000 now and $4,000 at the end of the following two years. Assuming that you are indifferent to cash versus credit, and that your cost of money is 6%, would you prefer the 3 installment option?

• A. Yes; present value of the installment option is $16,000.00
• B. Yes; present value of the installment option is $15,333.57
• C. No; present value of the installment option is $16,241.00
• D. No; present value of the installment option is $15,333.57

Answer 1

Select the option with lesser PV of Cash Outflows.

OPtion1 :

PV of Cash outflows = $ 15000

OPtion2:

Year	CF	PVF @6%	Disc CF
0	$ 8,000.00	1.0000	$   8,000.00
1	$ 4,000.00	0.9434	$   3,773.58
2	$ 4,000.00	0.8900	$   3,559.99
PV of Outflows unde Option2	$15,333.57

PVF(r%, n) = 1 / ( 1 + r)^n

r = Int rate per anum

n - No. of Years

OPtion1 is better as it has lesser PV of Cash Outflows.

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