Alex is going to work for a company for 1 year. The estimated cost of lunch...

Alex is going to work for a company for 1 year. The estimated cost of lunch for Alex is about $250 per month. The company has two options for his lunches:

Option 1) Company has a restaurant and Alex can use the restaurant by a provided card from company with no cost on Alex (Lunch is on company).

Option 2) Company will pay Alex $120 monthly and $1500 at the beginning of the year and then lunch will be on Alex.

If the interest rate is 8%, which option is more beneficial for Alex?

Solutions

Expert Solution

Year	Discounting Factor [1/(1.08^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
0	1	0	0
1	0.925925926	250	231.4814815
2	0.85733882	250	214.3347051
3	0.793832241	250	198.4580603
4	0.735029853	250	183.7574632
5	0.680583197	250	170.1457993
6	0.630169627	250	157.5424067
7	0.583490395	250	145.8725988
8	0.540268885	250	135.0672211
9	0.500248967	250	125.0622418
10	0.463193488	250	115.798372
11	0.428882859	250	107.2207148
12	0.397113759	250	99.27843966
		Net Outflow = Sum of PVs	1884.019504

Year	Discounting Factor [1/(1.08^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
0	1	1500	1500
1	0.925925926	120	111.1111111
2	0.85733882	120	102.8806584
3	0.793832241	120	95.25986892
4	0.735029853	120	88.20358234
5	0.680583197	120	81.66998364
6	0.630169627	120	75.62035523
7	0.583490395	120	70.01884743
8	0.540268885	120	64.83226614
9	0.500248967	120	60.02987606
10	0.463193488	120	55.58321857
11	0.428882859	120	51.46594312
12	0.397113759	120	47.65365104
		Net Inflow = Sum of PVs	2404.329362

Present Value of Net Inflow is Greater than Present Value of Net Outflow. Therefore, Option 2 is mor beneficial, because he will save some money even after paying for lunch.

jeff jeffy answered 1 year ago

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