Judy has a $1,200 overdue debt for books and supplies at Joe\'s bookstore. She o
ID: 2449829 • Letter: J
Question
Judy has a $1,200 overdue debt for books and supplies at Joe's bookstore. She only has $500 in her checking account and doesn't want her parents to know about the debit. Joe's tells her that she may settle the account in one of two ways since she can't pay it all now: 1. Pay $500 now and $1000 when she completes her residency, two years from today. 2. Pay $1600 one year after completion of residency, three years from today. Assuming that the cost of money is the only factor in Judys decision and that the cost of money to her is 8%, which alternative should she choose and why? Use calculations.
Explanation / Answer
Present value of paying 500 now and 1000 on completion of residency
= 500+(1000*PVF ( 8%,2 years)
= 500+(1000*0.8573) i.e 1357.30
Present value of paying 1600 3 years from today
= 1600* PVF ( 8%, 3 years)
= 1600*0.7938 i.e 1270
Its better to pay 1600 on completion of her residency as the presnt value of paying 1600 from today is less then the present value of 500 today and 1000 2 years from today
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