A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $85 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $50 per tire, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.5%?

Question

Quizplus · Accepted Answer

PV of the first offer:
PV = $85 × 600 ÷ (1 + 0.085) = $46,104.65

PV of the second offer:
PV = -$20,000 + ($50 × 600) ÷ (1 + 0.085) = $46,749.77

Difference in PV: 
$46,749.77 - $46,104.65 = $645.12

Therefore, the best choice is to choose the second offer, as it has a lower PV cost.

A Delivery Service Is Buying 600 Tires for Its Fleet