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 get a 10% discount on the purchase price. assume the product sells for $100.

A1) This is an annuity due with payments of $25 up front and $25 at the end of each of the next three years. The present value is determined as follows:

PMT equals the annuity payment of $25 at the start of each period.

I represents the period-to-period compound interest rate.

=0.05

4 payment periods make up the number n.

A-2)

Paying the debt in full is preferable than paying it in instalments since the former has a cheaper cost of $90 while the latter has a present value cost of $93.08.

B1)

If a full year passes before the 4-year instalment plan payments begin, the present value of the payment stream is determined as follows:

B-2)

In this situation, paying in instalments is the best option because it costs less ($88.65) than paying the amount in full at once ($90 at present value).

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Correct 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 10% discount 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a-2 Which is a better deal?

b-1. Calculate the present value if the payments on the 4-year installment plan do not start for a full year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-2. Which is a better deal?