Samos Excavating is considering purchasing some new equipment for the company. Due to the expense involved, the equipment company is giving Samos the option of choosing between four different payments plans.

Question

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1) $500,000 due immediately in cash
2) $150,000 down payment due immediately; $60,000 per year for 10 years, beginning at the end of the current year
3) $150,000 down payment due immediately; $30,000 per year for 4 years beginning at the end of the current year; $80,000 per year for 8 years beginning at the end of the fourth year after the initial purchase
4) $65,000 due immediately and at the beginning of each of the next 11 years
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Required:
Samos has to decide between the four payment plans, whichever one provides the smallest present value will be chosen. The effective interest rate during the future periods is 10%. Which option should Samos choose?

What will be an ideal response?

Answer 1

1)PV = $500,000?2)Down payment =                                 $150,00010 payments:?PVoof $60,000 for 10 years at 10% :           $60,000 × 6.144567                   $368,674                                                           $518,674?3)Down payment =                               $150,000First 4 payments:PVo of $30,000 for 4 years at 10%:             ?$30,000×3.169865                  95,096Next 8 payments:?PVoof $80,000 for 8 years at 10%:?             $80,000×5.334926 =            $426,794?PVoof $426,794 for 4 years at 10%?             $426,794×0.683013               291,506?TotalPV                                         $536,602??4)PVd of $65,000 for 12 years at 10%?        $65,000×7.495061                    $487,178??Option 4 has the lowest present value and is therefore the least expensive payment plan option.?