Astore offers two payment plans. under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. if you pay the entire bill immediately, you can take a 10% discount from the purchase price. assume the product sells for $100. a-1. calculate the present value of the payments if you can borrow or lend funds at an interest rate of 5 percent. (do not round intermediate calculations. round your answer to 2 decimal places.) a-2 which is a better deal? b-1. calculate the present value if the payments on the 4-year installment plan do not start for a full year. (do not round intermediate calculations. round your answer to 2 decimal places.) b-2. which is a better deal?

a-1) Present value of the instalment option = $93.08

     Present value of paying the bill immediately =$90

a2) Paying the bill immediately is the better deal

b-1) Present value of the instalment option = $88.65

b-2) Paying in instalments in this case is the better deal

Explanation:

a-1) Calculate Present value of the instalment option

The payments are spread out as follows: $25 immediately, and 25 at the end of each of the following 3 years, this is an annuity due where the present value is calculated as follows:

PMT = the annuity payment at the beginning of each period=$25

           i = interest rate per period that would be compounded for each period

=0.05

          n = number of payment periods=4

Present value = =$93.08

Present value of paying the bill immediately= $100 less the 10% discount= $100*0.9 = $90

a-2)Paying the bill immediately is the better deal as it has a lower cost of $90 compared to paying in instalments which a present value cost of $93.08

b1) If the payments on the 4-year instalment plan do not start for a full year, then the present value of the payment stream is calculated as follows:

                               =

                              = = 88.65

b-2) paying in instalments in this case is the better deal as it has a lower cost of $88.65  compared to paying the bill immediately  which has present value cost of $90.                          

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