Question

b) Maggie Moser has a $2,000 overdue debt for text books and supplies at Julie’s Bookstore. She has only $700 in her checking account and doesn’t want her parents to know about this debt. Julie’s tells her that she may settle the account one of two ways since she can’t pay it all now:

1.   Pay $700 now and $1,600 when she completes her degree, two years from today.

2.   Pay $2,500 one year after completion of her internship, three years from today.

Assuming that the cost of money is the only factor in Maggie’s decision and that the cost of money to her is 10%, which alternative should she choose? Your answer must be supported with calculations.

Answer 1

Answer :-

Referring to the below calculation, we can say Julie should opt for Second option of payment due to positive Net Present Value of $ 122.50.

Option A
Particulars	Amount ($)	Year	PVF @10%	Present Value ($)
Overdue for text books	2,000.00	0	1.00	2,000.00
First Installment	-700.00	0	1.00	-700.00
Second Installment	-1,600.00	2	0.83	-1,321.60
Net Present Value	-21.60
Option B
Cash Flows	Amount ($)	Year	PVF @10%	Present Value ($)
Overdue for text books	2,000.00	0	1.00	2,000.00
Single Installment	-2,500.00	3	0.75	-1,877.50
Net Present Value	122.50