You are building a yacht. It will be done in 5 years. You have 3 choices regardi

Question

You are building a yacht. It will be done in 5 years. You have 3 choices regarding payment. 1) You can pay for it now and pay $1,200,000; 2) you can pay for it when it is complete and pay $1,543,000; or 3) you can pay for it with end of the year installments of $250,000 per year for 5 years. Assume an interest rate of 7%.

In order to consider the value of choice 3, what time value of money variable should you solve for in order to compare it against the other choices?
PMT=1,437,685
PV=1,025,049
FV=1,250,000

Explanation / Answer

1) $ 1200000 2) PRESENT VALUE OF 1543000 = 1543000/1.07^5 = $ 1100137.675 3 ) 250000 * 5 = 1250000 Present value = 250000/1.07 + 250000/1.07^2 + 250000/1.07^3 + 250000/1.07^4 + 250000/1.07^5 = $ 1025049.35 THE BEST CHOICE WOUL BE TO pay for it with end of the year installments of $250,000 per year for 5 years SINCE THE PRESENT VALUE FOR THAT IS LOW In order to consider the value of choice 2, what time value of money variable should you solve for in order to compare it against the other choices? we should consider PV=1,100,138

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