A farmer has just purchased a tractor for which he had to borrow $20,000. The bank has offered the following choice of payment plans determined using an interest rate of 8%. If the farmer's minimum attractive rate of return (MARR) is 15%, which plan should he choose? Plan A: $5,010 per year for 5 years Plan B: $29,56 per year for 4 years, plus $15,000 at the end of 5 years Plan C: Nothing for 2 years, the $9,048 per year for 3 years
A farmer has just purchased a tractor for which he had to borrow $20,000. The bank has offered the following choice of payment plans determined using an interest rate of 8%. If the farmer's minimum attractive rate of return (MARR) is 15%, which plan should he choose? Plan A: $5,010 per year for 5 years Plan B: $29,56 per year for 4 years, plus $15,000 at the end of 5 years Plan C: Nothing for 2 years, the $9,048 per year for 3 years
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A farmer has just purchased a tractor for which he had to borrow $20,000.
The bank has offered the following choice of payment plans determined using an
interest rate of 8%. If the farmer's minimum attractive rate of return (MARR) is
15%, which plan should he choose?
Plan A: $5,010 per year for 5 years
Plan B: $29,56 per year for 4 years, plus $15,000 at the end of 5 years
Plan C: Nothing for 2 years, the $9,048 per year for 3 years
Expert Solution
Step 1
The concept of the time value of money states that the current worth of money is more than its value in the future.
Present value refers to the current value of a sum of money in the future at a specified interest rate.
The present value of annuity refers to the current value of some pre-defined amounts at regular time intervals at a particular interest rate.
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