Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer's proposal that Henri pay $5,000 down and $8,000 at the end of each of the next three years.
a) Which choice should Henri make if he can earn 5% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
b) Which choice should Henri make if he can earn 11% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
(Hint: When choosing among alternative streams of cash inflows, we should select the one with the greatest economic value. When choosing among alternative streams of cash outflows, we should select the one with the least economic value.)

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The Answer of Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer's proposal that Henri pay $5,000 down and $8,000 at the end of each of the next three years.
a) Which choice should Henri make if he can earn 5% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
b) Which choice should Henri make if he can earn 11% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
(Hint: When choosing among alternative streams of cash inflows, we should select the one with the greatest economic value. When choosing among alternative streams of cash outflows, we should select the one with the least economic value.)

Henri Has Decided to Purchase a $25,000 Car