Suppose the university offers the following payment plan: Either you pay $80,000 when enrolling as a freshman or you pay $25,000 at the beginning of your freshman year and $25,000 at the beginning of every year for the next three years. If the annual interest rate is 5%, then you should take option 1 and pay $80,000 at the beginning of your first year.

Question

Quizplus · Accepted Answer

To determine the better option, we can calculate the present value of each payment plan and compare them. Using the formula for present value of an annuity, the present value of paying $25,000 at the beginning of each year for 4 years at an annual interest rate of 5% is approximately $89,270. Adding the initial payment of $25,000, the total present value of option 2 is approximately $114,270.

Alternatively, we can calculate the present value of the $80,000 payment using the formula for present value of a lump sum, which is approximately $68,119. Since $68,119 is less than $114,270, it is better to choose option 1 and pay $80,000 at the beginning of the first year. Therefore, the answer is true.

Suppose the University Offers the Following Payment Plan: Either You