A store offers two payment plans. Under the installment plan, you pay 25% down a

Question

A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a 10% discount from the purchase price.

a.  

Calculate the present value of the payments. Assume the first payment starts one year from today, instead of immediately, and you can borrow or lend funds at a 5% interest rate. Assume the product sells for $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Calculate the payment net of discount.

c. Which is a better deal?

Pay the entire bill immediately
Installment Plan

Explanation / Answer

Down payment 25.00% Annuity 25.00% n     3.00 years Discount rate 10.00% Interest rate 5.00%

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