Reference no: EM132280278
Problem - Determine present value alternatives
Star Studios is looking to purchase a new building for its upcoming film productions. The company finds a suitable location that has a list price of $1,420,000. The seller gives Star Studios the following purchase options:
1. Pay $1,420,000 immediately.
2. Pay $420,000 immediately and then pay $132,000 each year over the next 10 years, with the first payment due in one year.
3. Make 10 annual installments of $160,000, with the first payment due in one year.
4. Make a single payment of $2,120,000 at the end of five years.
1-a. Determine the present value for each option assuming that the company can borrow funds to finance the purchase at 7%.
1-b. Which option is the lowest-cost alternative for Star Studios?