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 better payment scheme is scheme a).

Question

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To determine the better payment scheme, calculate the present value of both options using the 8% discount rate. Scheme b) has a higher present value, making it the better option.