Question

Afriend provided computer services for a neighbor. The payment agreed to was $8.500 upon completion. Today, instead of paying upon completion, the neighbor explained a cash flow crunch and offered the following 3-year payment planc Year 1 is $4,000, Year 2 is $3,000 Year 3 is $2.000, and Year 4 is $1,000. Your friend asked for help to evaluate this payment plan You believe an appropriate opportunity cost is 8% and quickly calculate NPV to evaluate Accept or Reject as: Accept becue NPV greater than $8.500

Answer 1

Please find the answer in given screen shot,

Amount in $.

Year 0 Year 1 Year 2 Year 3 NPV Payment Discount Factor @ 8% 3,000 2,000 1,000 0.7938 4,000 1.0000 0.9259 0.8573 4,000.00 2,777.78 1,714.68| 793.83 9,286.29 NPV is higher than 8,500 hence its acceptable offer. It's three year payment plan year 1 in problem refers to the current year hence its considered Year 0 in solution. If the payment was about to made one year after now then it will be four year payment plan and NPV will be as below Year 3 Year 1 Year 1 Year 2 NPV 2,000 1,000 Payment Discount Factor @ 8% 3,000 4,000 0.7350 0.8573 0.9259 0.7938 3,703.70 2,572.02 1,587.66 735.03 8,598.41 In this case also the NPV is higher than 8,500 - the offer would be accepted. Note, Discounting Factor 1/(1+r)^n number of year where, r rate of interest and n

Please hit Like! Thanks!