As a New Year's gift to yourself, you buy your roommate's 1976 Ford Pinto. She has given you the option of two payment plans. Under Plan A, you pay $500 now, plus $500 at the beginning of each of the next two years. Under Plan B, you would pay nothing down, but $800 at the beginning of each of the next two years.
a. Calculate the present value of each plan's payments if interest rates are 10%. Should you choose Plan A or Plan B?
b. Recalculate the present value of each plan's payments using a 20% interest rate. Should you choose Plan A or Plan B?
c. Explain why your answers to (a) and (b) differ.