Present Value Issues
Response to the following problem:
Nello Construction Company has just purchased several major pieces of road-building equipment. Since the purchase price is so large, the equipment company is giving Nello an option of choosing one of four different payment plans:
1. $600,000 immediately in cash.
2. $200,000 down payment now; $65,000 per year for 12 years, beginning at the end of the current year.
3. $200,000 down payment now; $25,000 per year for 3 years beginning at the end of the current year; $75,000 per year for 11 years beginning at the end of the fourth year after the purchase.
4. $80,000 now and at the beginning of each of the next 13 years.
Required
You have been asked by the Nello Construction Company to decide which payment plan will provide the smallest present value. The expected effective interest rate during the future periods stated above is 12%.