On August 1, 2016, Jason purchased machinery from Morgan for expanding its production operation. Morgan has given Jason three options for payment:
a.$300,000 in cash nowb.$150,000 down payment now and $50,000 per year for the next ten years beginning August 1, 2017c.$100,000 now and $100,000 per year for five years beginning August 1, 2017?
Required:Determine which of the above payment plans has the lowest present value. Clearly label all of your work. The effective annual interest rate is expected to be 12% during this period.
What will be an ideal response?
| a. | Present value $300,000 | ||
| ? | ? | ||
| b. | Present value of an ordinary annuity: | ||
| ? | ? | ||
| ? | PVOn,i | = $150,000 + (C´Factor for POn,i,) where n = 10, i = 12% | |
| ? | ? | = $150,000 + $50,000´5.650223 | |
| ? | ? | = $432,511 | |
| ? | ? | ? | |
| c. | Present value of an annuity due: | ||
| ? | ? | ? | |
| ? | PVd= C´Factor for Pdn= 6-1, i = 12% | ||
| ? | ? | ? | |
| ? | Table factor of n-1: | ? | |
| ? | Table factor for 5 | 3.604776 | |
| ? | ? | +1.000000 | |
| ? | Converted table factor | 4.604776 | |
| ? | ? | ? | |
| ? | PVd | = $100,000(4.604776) | |
| ? | ? | = $460,478 | |
| ? | ? | ? | |
| The lowest present value is payment plan a. | |||
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