Westover Industries needs to expand their warehouse space next year. They have been negotiating with contractors and are considering the two best offers. The first contract requires payment in full of $379,500 on the day the job commences. The second contract requires twelve monthly payments of $33,300, starting on the day the job commences. The discount rate is 9%. If the cost is the final deciding factor, Westover should accept the _____ contract because it costs _____ less in today's dollars than the other contract.

Question

Quizplus · Accepted Answer

The first contract requires a lump sum payment of $379,500, while the second contract requires twelve monthly payments of $33,300. To compare the two contracts, we need to calculate the present value of the second contract. The present value of an annuity is given by the formula:PV = PMT * [1 - (1 + r)^-n] / rwhere:PMT is the monthly paymentr is the monthly discount raten is the number of monthsIn this case, PMT = $33,300, r = 9% / 12 = 0.75%, and n = 12. Plugging these values into the formula, we get:PV = $33,300 * [1 - (1 + 0.0075)^-12] / 0.0075= $33,300 * [1 - 0.8853] / 0.0075= $33,300 * 0.1147 / 0.0075= $375,361.54Therefore, the present value of the second contract is $375,361.54. Since this is less than the lump sum payment of $379,500 required by the first contract, Westover should accept the second contract.

Westover Industries Needs to Expand Their Warehouse Space Next Year