Your firm needs to buy additional physical therapy equipment that costs $27,000. The equipment manufacturer will give you the equipment now if you will pay $7,000 per year for the next 5 years. Assume your firm can borrow at a 13% interest rate. You need to analyze if your firm should pay the manufacturer the $27,000 now or accept the five-year annuity offer of $7,000. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the present value of the annuity (five-year payment plan) and compare it to the $27,000 cash price. The present value of the annuity can be calculated using the formula: 
PV = A x [(1 - (1+i)^-n) / i], where A is the annual payment, i is the interest rate, and n is the number of years. Plugging in the numbers, we get: 
PV = $7,000 x [(1 - (1+0.13)^-5) / 0.13] = $24,620.62
So, choosing to pay for the equipment over time (Option B) would be the best choice, as it only costs $24,620.62 in present value terms, which is less than the $27,000 cash price.

Your Firm Needs to Buy Additional Physical Therapy Equipment That