Exercise C-4 Calculate the present value of a single amount (LOC-2) Ray and Rach

Question

Exercise C-4 Calculate the present value of a single amount (LOC-2) Ray and Rachel are considering the purchase of two deluxe kitchen ovens. The first store offers the two ovens for $2,600 with payment due today. The second store offers the two ovens for $2,800 due in one year. Required 1-a. Assuming an annual discount rate of 9%, calculate the present value. (E Round your answers to 2 decimal places.) of$1. Pyo 1, EAo 1, and PY of 1) (Use appropriate factor(s) from the tables provided. Present Value Store 1 Store 2 1-b. From which store should Ray and Rachel buy their ovens? Store 1 Store 2

Explanation / Answer

Answer is Store 2

Working

The Store 1 offer is payment of $2,600 immediately.

The Store 2 offer is paymentof $2,800 after one year.

Present value of a sum P payable after n periods at discounting rate of r

is P/(1+r)^n

For the present cae P=2,800, r=0.09 and n = 1

Present value = 2800/(1+0.09) = 2800 / 1.09 = 2,569

Since the present value of Store 2 offer is less than the Store 1 offer , Ray and Rachel shoudl buy their ovens from Store 2.

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