Nelson Company owes money to Nash Company for the purchase of equipment. Nash Company has given Nelson the following payment options:
I. Immediate payment in full of $38,000.
II. Annual payments of $15,000 made at the end of each of the next three years.
III. A single payment of $48,000 made at the end of three years.
Assume that both Nelson and Nash use a 10% interest rate compounded annually. What option would Nash prefer, and what is the present value of that option?
A) Option I, $34,542.
B) Option I, $38,000.
C) Option II, $37,305.
D) Option III, $34,164.
E) Option III, $36,048.

Question

Quizplus · Accepted Answer

Nash would prefer Option I as it provides the highest present value of $38,000, which is the immediate payment.

Nelson Company Owes Money to Nash Company for the Purchase