Afterthought Construction Co. is about to sell some used equipment to ABC Leasing. ABC has offered the following two payment schemes: a) $50,000 now and $200,000 at the end of seven years or b) $50,000 now, $50,000 at the end of two years, $50,000 at the end of five years, and $150,000 at the end of ten years. If the applicable discount rate for either transaction is 8%, the net present value of option a) is $166,700 and b) $196,375.

Question

Quizplus · Accepted Answer

The net present value of option b) is higher than that of option a), indicating that option b) is the more favorable payment scheme.