11.3 B10

Imagine you are standing in front of a piece of equipment…something you’ve always wanted. Perhaps a cement mixer? Anyway, the sales guy gives you a choice. Let’s work through the choices:

Case A: PMT 150 PY 12 CY 12 N 1.5 * 12 = 18 IY 13.56 FV 0 CPT PV 2430.76

So you could buy the mixer for 2430.76 cash right now, or finance it.

You look dubious, so the sales guy says ‘hey wait!’. How about you pay nothing for a year and then pay $180 a month for 18 months.

Case B. There are two problems to solve here. First, the PV of the payments which you would have to start making in a year’s time. And then the PV of the money you need to have ready in a year’s time.

First, the PV of your financial obligations in a year’s time:

PMT 180 CPT PV 2916.91 (I’ve left off the other entries, they’re the same).

But you want to compare this 2916.91 with the other offer made for TODAY in Case B.

So now calculate the present value of 2916.91, which is just a straightforward PV problem, no longer an annuity:

FV 2916.91 N 1 * 12 = 12 CPT PV 2548.96.

So it looks like Case A would be best….