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Your auto dealer gives you the choice to pay $15,500 cash now, or make three payments: $8,200 now, $4,200 in one year and $3,200 in two years. If your cost of money (discount rate) is 7.25%, what is the PV of the installment plan?

Respuesta :

Answer:

The answer is $14,898.07

Explanation:

Assume that the cost of money (discount rate) of 7.25% is on annual basis.

Present value (PV) of the installment plan is:

PV = Down payment + PV(first installment) + PV(second installment)

= $8,200 + $4,200 / (1 + 7.25%) + $3,200 / (1 + 7.25%)^2 = $14,898.07

Obviously, the three payments option is more lucrative than the 100% down payment one.

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