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1) Congratulations, you just bought a new jacuzzi!   You have two payment options. Option 1 is...

1) Congratulations, you just bought a new jacuzzi!   You have two payment options. Option 1 is to pay $3000 in one year from today, $5,000 in two years from today, and $8,000 in three years from today. Option 2 is to pay $15,000 today. Demonstrate which is the better option for you if money is worth 5.00 % p.a. simple interest. Don’t forget to state which is the better option for you

*Please use financial calculator method and show the values being entered for PY, CY, I, N, PMT, FV, PV along with your final answer*

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Homework Answers

Answer #1
year Cash flow × discount factor Present value
1 $      3,000 0.952381 $   2,857.14
2 $      5,000 0.907029 $   4,535.15
3 $      8,000 0.863838 $   6,910.70
Total $ 14,302.99

Value of cash flows to be received in future at today's dollars is $ 14,302.99 which is less than option 2 $15,000 lumpsum payment.

It is better to take $15,000 today than taking future payments.

Answer is option 2

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