Calculate the present value of each alternative

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Question - A company has purchased goods from a supplier. The following options are offered for payment of the goods:

i) An upfront payment of $80,000 immediately.

ii) A lump sum payment of $130,000 due in five years' time.

iii) A payment plan of $1,000 per month paid at the end of each month for ten years.

iv) A payment plan of $660 per month paid at the end of the month forever. Assume the interest rate is 9% per annum and that interest is compounded monthly for all alternatives.

Required -

(a) Explain why the time value of money needs to be considered before a decision can be made.

(b) Calculate the present value of each alternative and determine which payment option the company should accept.

Reference no: EM132923691

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