Question

Lights, Camera, and More sells filmmaking equipment. The company offers three purchase options: (1) pay full cash today, (2) pay one-half down and the remaining one-half plus 10% in one year, or (3) pay nothing down and the full amount plus 15% in one year. George is considering buying equipment from Lights, Camera, and More for $60,000 and therefore has the following payment options: Payment Today Payment in One Year Total Payment Option 1 $60,000 $ 0 $60,000 Option 2 30,000 33,000 63,000 Option 3 0 69,000 69,000 Required: 1-a. Assuming an annual discount rate of 12%, calculate the present value and the total cost. 1-b. Which option's cost has the lowest present value?

Answer 1

1-a. The present value for each payment option is:

Option 1: PV = $60,000 / (1 + 0.12)¹ = $53,571.43

Option 2: PV = [$30,000 / (1 + 0.12)¹] + [($33,000 / (1 + 0.12)²] = $50,446.43

Option 3: PV = $69,000 / (1 + 0.12)² = $53,571.43

The total cost for each payment option is:

Option 1: $60,000

Option 2: $63,000

Option 3: $69,000

1-b. Based on the present value calculations, option 2 has the lowest present value of $50,446.43. Therefore, option 2 is the best choice for George if he wants to minimize his total cost while taking into account the time value of money.

Step-by-step explanation: