A. A store offers two payment plans. Under the installment plan, you pay 20% dow

Question

A. A store offers two payment plans. Under the installment plan, you pay 20% down and 20% of the purchase price in each of the next 5 years. If you pay the entire bill immediately, you can take a 5% discount from the purchase price.

B. Calculate the present value of the payments, if the payments on the 5-year installment plan do not start for a full year and you can borrow or lend funds at a 8% interest rate. Assume the product sells for $100.

C. Calculate the payment net of discount.

D. Which is a better deal?
Pay the entire bill immediately
Installment plan

Explanation / Answer

B. Payment per annum =$20 Number of payments = 5 Interest rate = 8% PV of payments = $20(down payment) + $79.85(PV of annuity) = $99.85 C. payment net of discount = 100-5 =$95 D. Hence paying the entire bill immediately is a better deal since it costs only $95 instead of $99.85 for the installment plan

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