(c) Judy Thomas has a $1,800 overdue debt for medical books and supplies at Joe\

Question

(c) Judy Thomas has a $1,800 overdue debt for medical books and supplies at Joe's oesn't want her parents to this debt. Joe's tells her that she may settle the account in one of two Bookstore. She has only $600 in her checking account and d know about ways since she can't pay it all now: 1. Pay $600 now and $1,500 when she completes her residency, two years frorm today 2. Pay $2,400 one year after completion of residency, three years from today. Assuming that the cost of money is the only factor in Judy's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations.

Explanation / Answer

1/(1+.08)^n Option A Option B Dis. Fact. PV of Option A PV of Option B Year 0 600 1.00000                         600                          -   1 0.925926                             -                            -   2 1500 0.857339                      1,286                          -   3 2400 0.793832                             -                     1,905 Present Value of Inflow                      1,886                   1,905 Since the present value of option 'B' is higher so it should be preferred

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