Question

A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a discount of 10% from the purchase price. Assume the product sells for $100. a-1. Calculate the present value of the payments if you can borrow or lend funds at an interest rate of 5 percent.

Answer 1

the present value of each dollar that you borrow is $0.93

Step-by-step explanation:

we can use the present value of an annuity due formula to calculate the present value of the installment loan:

PV = annual payment x annuity factor = $0.25 x 3.7232 (PV annuity due, 5%, 4 periods) = $0.9308 ≈ $0.93

the present value of each dollar that you borrow is $0.93 if you can borrow money at 5%