Question

a doctor is planning to buy a machine for his clinic. he has two options. he can buy by paying cash payments of 0.5 million or 0.615 million in 6 equal annual installment and rate of interest is 12%. what will be your advice and how much will you benefit?

Answer 1

To advise the doctor on the preferable payment method for a machine, it is essential to calculate the present value of the installment payments and compare it with the immediate cash payment, considering the interest rate, cash flow, tax considerations, and investment opportunities.

Step-by-step explanation:

To advise a doctor on whether to buy a machine with a cash payment of 0.5 million or choose the option of 6 equal annual installments of 0.615 million with an interest rate of 12%, it is necessary to compare the present value of the installment payments with the cash payment. Assuming the 0.615 million is the total amount paid over 6 years, each installment would be approximately 0.1025 million. Using a financial calculator or formula for present value of an annuity, we can determine the present value of these installments given the 12% interest rate. The cash payment is the present value by default since it is a single payment made now.

If the present value of the installment option is higher than the cash payment, it would make more financial sense to pay in cash. If it is lower, the installment plan is more beneficial. However, one should consider not only the mathematical outcome but also cash flow implications, tax considerations, and investment opportunities with the retained capital when making the decision.