Three different plans were presented to the GAO by a high-technology facilities manager for operating a small weapons production facility. Plan A would involve renewable 1-year contracts with payments of $1 million at the beginning of each year. Plan B would be a 2-year contract, and it would require four payments of $600,000 each, with the first one to be made now and the other three at 6-month intervals. Plan C would be a 3-year contract, and it would entail a payment of $1.5 million now and another payment of $0.5 million 2 years from now. Assuming that the GAO could renew any of the plans under the same conditions if it wants to do so, which plan is better on the basis of a present worth analysis at an interest rate of 11% per year, compounded semiannually?
Three different plans were presented to the GAO by a high-technology facilities manager for operating a small weapons production facility. Plan A would involve renewable 1-year contracts with payments of $1 million at the beginning of each year. Plan B would be a 2-year contract, and it would require four payments of $600,000 each, with the first one to be made now and the other three at 6-month intervals. Plan C would be a 3-year contract, and it would entail a payment of $1.5 million now and another payment of $0.5 million 2 years from now. Assuming that the GAO could renew any of the plans under the same conditions if it wants to do so, which plan is better on the basis of a present worth analysis at an interest rate of 11% per year, compounded semiannually?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Three different plans were presented to the GAO by a high-technology facilities
manager for operating a small weapons production facility.
Plan A would involve renewable 1-year contracts with payments of $1 million at the
beginning of each year.
Plan B would be a 2-year contract, and it would require four payments of $600,000
each, with the first one to be made now and the other three at 6-month intervals.
Plan C would be a 3-year contract, and it would entail a payment of $1.5 million now
and another payment of $0.5 million 2 years from now. Assuming that the GAO
could renew any of the plans under the same conditions if it wants to do so, which
plan is better on the basis of a present worth analysis at an interest rate of 11% per
year, compounded semiannually?
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