Suppose that you can subscribe to a magazine using either a one-year rate of $22

Question

Suppose that you can subscribe to a magazine using either a one-year rate of $22, a two-year rate of
$42, or a three-year rate of $60. If want to receive this magazine for three years and if your
opportunity cost of funds is 12%, which rate offers the lowest cost?
a. A three-year subscription costing $60 and paid immediately.
b. Three one-year subscriptions, of $22 each, paid at the beginning of each year.
c. A two-year subscription paid immediately, costing $42, followed by a one-year subscription
costing $22 and paid at the beginning of the third year.
d. A one-year subscription paid immediately, costing $22, followed by a two-year subscription
costing $42 and paid at the beginning of the second year.
e. There is not enough information provided to answer this question.

Explanation / Answer

a. A three-year subscription costing $60 and paid immediately.

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