Question
In: Finance
LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your...
LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your company from LLL, you as a financial manager have narrowed down two equipment models which meet your performance requirements equally. However, the schedule of payments of two models are different. Model A requires yearly payment of $15,000 for 5 years with the first payment to be made today. Model B requires yearly payment of $15,500 for 5 years with the first payment to be made end of year 1. Given yearly interest rate of 5.5%, which model would you recommend to purchase and why?
Solutions
Expert Solution
Which machine should be selected by comparing using present worth of payments.
Here Machine A involves payment at beginning of the year, that present value of annuity due.
Machine B involves payment at end of year, that is present value of ordinary annuity.
PV of Model A = $ 67,577.25
PV of Model B = $ 66,189.41
Here present value of Model B is lower than the PV of Model A.
Hence model B is selcted.
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