Determine the present value for each option

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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.

Required:

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?

Reference no: EM132280278

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