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Elizabeth & Nancy are each contemplating an expenditure alternative. Advise them on the best alternative. Elizabeth’s...

Elizabeth & Nancy are each contemplating an expenditure alternative. Advise them on the best alternative.

Elizabeth’s alternative involves making payments of $1700 now and $2210 at the end of every six months for 6 years. Interest is 12% compounded semi-annually.

Nancy’s alternative involves making end of monthly payments of $500 for seven years. Interest is 12% compounded monthly.

Which is the lowest expenditure alternative?

Solutions

Expert Solution

Answer - Elizabeth's Alternative is lowest expenditure alternative

Workings

We will calculte present value of both the alternative using a financial calculator

Alternative 1 - Elizabeth

First of all we will calculate the present value of $2210 at the end of every six months for 6 years. Interest is 12% compounded semi-annually. and then add 1700 to it to get the total expenditure in present value terms

PMT = 2210

N = 12 ............(2 paymnets per year * 6years)

I/Y = 6 ............... (12/2)

CPT - PV = 18528.29

Now we will add 1700 to the present value calculted above to get the total expenditure in present value terms

Total Expendititute in present value terms = 18528.29 + 1700 = 20228.29

Alternative 2 - Nancy

We have the following information

PMT = 500

I/Y = 1 ............. (12/12)

N = 84 .............. (12 months * 7years)

CPT - PV = 28,324

Total Expendititute in present value terms = 28,324

jeff jeffy answered 1 year ago
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