Three different plans were presented to the GAO (General Accounting Office) by a high-tech facilities manager for operating a portable cyber-security facility. Plan A: Renewable 1-year contracts with payments of $1 million at the beginning of each year. Plan B: A 2-year contract that requires three payments of $600,000 each, with the first one to be made immediately and the second and third payment made at the beginning of the following two 6-month intervals; no payments required during the second year of the contract. Plan C: A 3-year contract that entails a payment of $1.5 million now and another payment of $0.5 million 2 years from now. Assuming the GAO can renew any of the plans under the same conditions, if it decides to do so, which plan is best on the basis of a present worth analysis at an interest rate of 6% per year, compounded semiannually? Solve using (a) factors and (b) a spreadsheet. (Hint: Construct a cash flow diagram before working this problem.)
Three different plans were presented to the GAO
(General Accounting Office) by a high-tech facilities
manager for operating a portable cyber-security
facility.
Plan A: Renewable 1-year contracts with payments
of $1 million at the beginning of each year.
Plan B: A 2-year contract that requires three payments
of $600,000 each, with the first one
to be made immediately and the second
and third payment made at the beginning
of the following two 6-month intervals; no
payments required during the second year
of the contract.
Plan C: A 3-year contract that entails a payment of
$1.5 million now and another payment of
$0.5 million 2 years from now.
Assuming the GAO can renew any of the plans
under the same conditions, if it decides to do so,
which plan is best on the basis of a present worth
analysis at an interest rate of 6% per year, compounded
semiannually? Solve using (a) factors and
(b) a spreadsheet. (Hint: Construct a cash flow diagram
before working this problem.)
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