Question

PV of Multiple Cash Flows Example Your auto dealer gives you the choice to pay $15,500 cash now, or make three payments: $8,000 now and $4,000 at the end of the following two years. If your cost of money is 8%, which do you prefer? (1+.08) Immediate payment 8,000.00 PV = 4,000 - 3,703.70 PV, = 4.000 = 3,429.36 Total PV = $15,133.06 Tr a n Hill Dragant Value of Annuity Stream

Answer 1

Solution You have two Alternative it to choices pay $15,500 cash now Alternative 24 To pay $ 8,000 now and $4,000 at the end of the following two years. lost of Money is 8%. ill calculate culate present value of present ve alternative 27 Present value of $8,000 to be paid mow is $8,000, I Present value of $4,000 to be paid at the end of I following two years is to be calculated The formula for Present value isy PV = FV 11+4) where, Fuz Future cash flow . a Ma cost of Money na time year endt Pv of $4,000 to be paid at first - PV = $4000 $4000 1+0.08)' - 1.08

= $370 3.70 - PV of $4,000 to be paid at end of second years) PV = $4,000 (1+0.0872 : $4,000 (1.0872 = $4,000 1,1664 = $ 3429.35528 07. $3,429.36 (approx) Present value of total payments is alternative 27 $8,000 + $ 3703.70 + $ 3429.36 = $15,133.06 Since the PN in alternative a is less than pu in alternative 1 ,so, you will prefer alternative a as you will have to pay less amount considering present value and time value of money,