In: Finance
Monash College is purchasing a new telephone system that will last for 4 years. It can purchase the system using one of the following two options
Question
Part a.
We need to compare present value of both the options.
The Present value in option A is simply the Up-front cost of $178,000.
The Present value of option B = present value of annuity due of $4000 each for 47 months at interest rate of 5% p.a.
To find the present value of annuity, we can use manual formula
or we can also use the PV function of Excel or financial calculator as shwon below:
So the present value of that annuity is $171,125.60 which is less than option A. Thus Option B should be chosen.
Part b.
If the monthly payments were made at the end of each month, the present value of the option B would have been even lower, because at any positive rate of interest, same payments later in the time are worth less than those earlier in the time. Thus option B would still have remained the preferred choice.