Question

Your firm is considering the purchase of a new office phone system. You can either pay (Option 1) $32,000 now, or (Option 2)$1,000 per month for 36 months.

1. Suppose your firm currently borrows at 6% per year compounding monthly. Which option is best?

2. Suppose your firm currently borrows at 10% per year compounding monthly. Which payment plan option is more attractive in this case? Interest rate aside, what factors may force your firm into option 2.

Answer 1

1. If the firm borrows $ 32,000 at 6% per year compounding monthly would amount to $ 38,293.78 in 3 years. However if the firm Deposits regularly $ 1,000 at 6% per year compounding monthly would amount to $ 39, 533.98.

Hence it is preferable to purchase the new office phone system by paying $ 32,000.as per option 1

2  If the firm borrows $ 32,000 at 10% per year compounding monthly would amount to $ 43,141.82 in 3 years. However if the firm Deposits regularly $ 1,000 at 10% per year compounding monthly would amount to $ 42,131.35.

Hence it is preferable to purchase the new office phone system by paying $1,,000.per month for 36 months as per option 2