Question

10. value: 10.00 points You can purchase a residential building lot for $90,000 cash, or for $20,000 down and quarterly payments of $5000 for four years. The first payment would be due three months after the purchase date. If the money you would use for a cash purchase can earn 8% compounded quarterly during the next four years, which option should you choose? the quarterly payment plan the $90,000 cash price What is the economic advantage in current dollars of the preferred alternative? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Economic advantage $

Answer 1

Quarterly rate of interest = 8%/4 = 2%

Present value of quarterly payments plan = 20,000 + 5000*PVAF(2%, 16 periods)

= 20,000 + 5000*13.5777

= $87,888.5

Hence, quarterly plan is more beneficial as present value of payments is lower

Economic Advantage = Cash price – Present value of payments under quarterly plan

= 90,000-87,888.5

= $2,111.5