A store offers two payment plans. Under the installment plan, you pay 12.5% down

Question

A store offers two payment plans. Under the installment plan, you pay 12.5% down and 12.5% of the purchase price in each of the next 7 years. If you pay the entire bill immediately, you can take a 15% discount from the purchase price.

a. Calculate the present value of the payments, if you can borrow or lend funds at a 6% interest rate. Assume the product sells for $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $

b. Calculate the payment net of discount. Payment net of discount $ c.

c. Which is a better deal?

Installment payment plan

Pay the entire bill immediately

Explanation / Answer

Answer a.

If we chose installment plan then 12.5 is paid as downpayment and 12.5 for the next 7 years.

Present value of this plan @6% = 12.5 + 12.5/1.06 + 12.5/1.06^2 + .. + 12.5/1.06^7

= $82.28

Answer b.

Net discount payment = 100 - 15%*100 = 85

Answer c.

Installment payment plan is better.

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