Question:
Part A: You have been offered the choice of 3 prizes;
Prize 1: $15,000 cash payable immediately;
Prize 2: 2 yearly payments of $8,000, with the first instalment due in 1 year's time (assume yearly compounding);
Prize 3: $490 per month for 2 years, with the first instalment due in 1 month's time (assume monthly compounding)
Other information:
Current interest rates are 9% per year.
(a) Based on present values, which prize would you prefer and why? Show workings for all prizes, and explanations in your answer.
(b) What do finance experts mean when discussing "the power of compounding"? Provide a brief example to support your answer.
Part B:
A TV is for sale at $6000. You cannot afford to pay cash, and were offered the following payment methods:
i. Pay 15% deposit upfront and pay the balance over 2 years, in equal monthly instalments. Assuming a simple rate of interest at 12% per year, how much would you pay per month?
ii. What will be the total amount paid?
iii. If you paid cash at the beginning, how much would you have saved?