Post by: mp14 on Jun 7, 2019
Question 1
Nick has a choice to pay $1499 for a TV now or pay $1599 3 years from now. What should be the minimum interest rate at which Nick should invest $1499 to make a decision to pay 3 years from now?◦ 6.67%
◦ 0.725%
◦ 2.176%
◦ 3%
◦ 6.528%
Question 2
Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a payment of $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at the beginning of every 3 months. If the leased water heater can be bought after 10 years for $80, should Molly buy or lease the water heater, if money is compounded quarterly at 2.5%?Post by: JaynaD87 on Jun 7, 2019
Answer 1
2.176%Answer 2
Present value of cash payment for the water heater = $2200| For PMT = $30; | n = 40; | P/Y = 4; | C/Y = 4; | I/Y = 2.5%; | i = 0.625% |
= $1058.85Present value of decision to buy the water heater = $3258.85
For PMT = $100; n = 40; i = 0.625%
Present value of the lease payment annuity due = $90 × 1.00625 ×
= $3196.39Present value of the purchase price after 10 years = $80 × 1.00625-40= $62.35
Present value for the decision to lease = $3258.74
Both options result into the same economic value, within the rounding error.
Post by: mp14 on Jun 7, 2019
Post by: JaynaD87 on Jun 7, 2019