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Explain why the time value of money needs

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Reference no: EM132569547

A company has purchased goods on invoice from a supplier.

The following alternatives are offered for payment:

1) An upfront payment of $20,000 today

2) A lump sum payment of $25,000 due in three years' time

3) A payment plan of $700 per month paid at the end of each month for three years

4) A payment plan of $140 per month paid at the end of the month forever

Assume the interest rate is 8% per annum and that interest is compounded monthly for all alternatives.

(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: EM132569547

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