Your firm is considering the purchase of a new office phone system. You can either pay $32 000 now

QUESTION

Your firm is considering the purchase of a new office phone system. You can either pay $32,000 now, or $1000 per month for 36 months. a. Suppose your firm currently borrows at a rate of 6% per year (APR with monthly com- pounding). Which payment plan is more attractive? b. Suppose your firm currently borrows at a rate of 18% per year (APR with monthly com- pounding). Which payment plan would be more attractive in this case?
Option 1: T0 = 32000 a) Option 2: Need to pay 1000 dollars a month for 36 months Annutiy formula = C*(1-(1+i)^-n)/i) Here, C = 1000 Monthly interest = approx 6/12 = 0.5% So, present value = =1000*((1-(1+.5%)^-36)/.5%) 32871.02 So, option 1 is better as we just need to pay 32000 when compared to 1000 dollars a month where the PV is more. b) Option 2: Need to pay 1000 dollars a month for 36 months

nnutiy formula = C*(1-(1+i)^-n)/i) Here, C = 1000 Monthly interest = approx 18/12 = 1.5% So, present value = =1000*((1-(1+1.5%)^-36)/1.5%) 27660.68 So, option 2 is better as we need to pay 32000 which is more when compared to 1000 dollars a month where the PV is less

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