Question

1. A weekly magazine offers a 1-year subscription for $45 and a 3-year subscription for $118. If you read the magazine for at least the next 6 years, which type of subscription would you prefer if the interest rate is 10% over the next 6 years? Assume the subscription rate remains the same over the next 6 years.

Answer 1

ANSWER:

I = 10%

1) 1 YEAR SUBSCRIPTION:

PW = PRICE IN YEAR 0 + PRICE PER YEAR(P/A,I,N) = 45 + 45(p/a,10%,5) = 45 + 45 * 3.791 = 45 + 170.595 = 215.595

2) 3 YEAR SUBSCRIPTION:

PW = PRICE NOW IN YEAR 0 + PRICE IN YEAR 3(P/F,I,N) = 118 + 118(P/F,10%,3) = 118 + 118 * 0.7513 = 118 + 88.6534 = 206.65

SO I WOULD PREFER 3 YEAR SUBSCRIPTION AS THE PW OF 3 YEAR SUBSCRIPTION IS LESS THEN THAT OF 1 YEAR SUBSCRIPTION.