Question

upon graduation my Tuition loan calls me to choose one of two payments. the first plan requires me to pay 5,000 a year for 5 years and the second plan calls for payment of 3,000 a year for 10 years. indicate which is the better alternative for you if your discount rate is 11%

Answer 1

Ans Second Plan is better since it has lower present value of cash flows.

FIRST PLAN
Year	Project Cash Flows (i)	DF@ 11%	DF@ 11% (ii)	PV of Project A ( (i) * (ii) )
1	5000	1/((1+11%)^1)	0.901	4,504.50
2	5000	1/((1+11%)^2)	0.812	4,058.11
3	5000	1/((1+11%)^3)	0.731	3,655.96
4	5000	1/((1+11%)^4)	0.659	3,293.65
5	5000	1/((1+11%)^5)	0.593	2,967.26
		PV		18,479.49

SECOND PLAN
Year	Project Cash Flows (i)	DF@ 11%	DF@ 11% (ii)	PV of Project A ( (i) * (ii) )
1	3000	1/((1+11%)^1)	0.901	2,702.70
2	3000	1/((1+11%)^2)	0.812	2,434.87
3	3000	1/((1+11%)^3)	0.731	2,193.57
4	3000	1/((1+11%)^4)	0.659	1,976.19
5	3000	1/((1+11%)^5)	0.593	1,780.35
6	3000	1/((1+11%)^6)	0.535	1,603.92
7	3000	1/((1+11%)^7)	0.482	1,444.98
8	3000	1/((1+11%)^8)	0.434	1,301.78
9	3000	1/((1+11%)^9)	0.391	1,172.77
10	3000	1/((1+11%)^10)	0.352	1,056.55
		PV		17,667.70