An obligation can be settled by making a payment of $12 000 now and a final payment of $32 000 in 4 years. Alternatively, the obligation can be settled by payments of $2700 at the end of every three months for five years. Interest is 10% compounded quarterly.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Question

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The Answer is ALT. 1 = 12000.00 + 32000.00(1.025)^-16

ALT. 1 = 12000.00 + 32000.00(1.025)<sup>-16 </sup> ALT. 2 = 2700.00 = 2700.00(15.5891623) = $42090.74 = $42 091 Since the present value of Alternative 1 is less than the present value of Alternative 2, Alternative 1 is preferable.

ALT. 2 = 2700.00 ALT. 1 = 12000.00 + 32000.00(1.025)<sup>-16 </sup> ALT. 2 = 2700.00 = 2700.00(15.5891623) = $42090.74 = $42 091 Since the present value of Alternative 1 is less than the present value of Alternative 2, Alternative 1 is preferable.

= 2700.00(15.5891623) = $42090.74 = $42 091
Since the present value of Alternative 1 is less than the present value of Alternative 2, Alternative 1 is preferable.

An Obligation Can Be Settled by Making a Payment of $12