Question

We have acquired new furniture for the office. The invoice for $6,000 offers two ways to pay: we can pay the entire amount by September 1, or we can pay $3,060 by September 1 and $3,000 by January 1. How does our decision depend on the interest rate at which we can invest our funds? need excel sheet explaining

Answer 1

The plan to choose depends on appropriate return on investment we can achieve

Here is an Excel sheet

For plan 1 we pay full amount in sept 1

For Plan 2

We have paid 3060 in sep 1

We still have 2940 left which can be invested in risk free rate to achieve higher return.

Let return be 7%

So we get a 4months return Sept to Jan of 3008.6

While we have to pay only 3000

This leaves us with additional gain of 8.6

So it depends on the rate at which we are investing or discounting the cash flow.

We would have chosen plan 1 if returns were less .