Question

1. Joanne has a $2,800 overdue debt for medical books and supplies at Joe's Bookstore. She has only $900 in her checking account and doesn't want her parents to know about this debt. Joe's tells her that she may settle the account in one of two ways since she can't pay it all now: 1. Pay $900 now and $2,300 when she completes her residency, two years from today. 2. Pay $3,700 one year after completion of residency, three years from today. Assuming that the cost of money is the only factor in Joanne's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations. Instructions: Which method of payment do you recommend? Alternative 1 Present value of $2,300 discounted (PV of $1 table) @8% for 2 years ($2,300 x .85734) = Present value of $2,300 now = $1,972 Present value of $900 now = 900 Present value of Alternative 1 $2,872 Alternative 2 Present value of $3,700 discounted (PV of $1 table) @ 8% for 3 years ($3,700 x .79383) $2,937 On the present value basis, Alternative 1 is preferable.

Answer 1

Both the solutions are perfectly correct. Would you please tell what else to do?