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    vaibhav bakshi
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    The document calculates and compares the net costs today of different options for purchasing appliances: (1) Purchasing using a bank loan would have a net cost today of $4,000. (2) Renting-to-buy would have a net cost today of $4,159.93, calculated using present value formulas to discount monthly rental payments and a terminal purchase payment over 4 years at an annual interest rate of 7%. (3) The cheapest option is purchasing using a bank loan, which has the lowest net cost of $4,000.

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    The document calculates and compares the net costs today of different options for purchasing appliances: (1) Purchasing using a bank loan would have a net cost today of $4,000. (2) Renting-to-buy would have a net cost today of $4,159.93, calculated using present value formulas to discount monthly rental payments and a terminal purchase payment over 4 years at an annual interest rate of 7%. (3) The cheapest option is purchasing using a bank loan, which has the lowest net cost of $4,000.

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    3 views1 page

    CSE

    Uploaded by

    vaibhav bakshi
    The document calculates and compares the net costs today of different options for purchasing appliances: (1) Purchasing using a bank loan would have a net cost today of $4,000. (2) Renting-to-buy would have a net cost today of $4,159.93, calculated using present value formulas to discount monthly rental payments and a terminal purchase payment over 4 years at an annual interest rate of 7%. (3) The cheapest option is purchasing using a bank loan, which has the lowest net cost of $4,000.

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    © All Rights Reserved
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    <!

    DOCTYPE html>
    <html lang="en">
    <head> <meta charset="utf-8">
    <title> </title>
    <style>
    *{margin: 0;padding: 0;}
    .main{width: 900px;margin: auto;}
    .topic{margin: 20px 0;box-shadow: 0 2px 5px 0 rgba(0,0,0,0.2);border-radius:
    6px;}
    .t1 {padding: 10px;}
    .topic img{
    max-width: 100%;
    }
    .pbImageToTextHint{display: none;}
    .t2 li{list-style: none;border: 1px solid #ccc;}
    .answer-given-body p img{
    width: auto !important;height: auto!important;max-width: 100% !
    important;
    }
    .hidden {visibility:hidden; }
    </style>
    </head>
    <body>
    <div class="main"> <h2> Question:<span class="title"></span></h2> <div
    class="topic t1"> <div class="pbImages"><img src="" /> </div>
    </div> <div class="topic t2"><div><p><u><strong>Calculation of net cost today of
    the cheapest option</strong></u></p> <p><strong>(i) Purchase using bank
    loan</strong></p> <p>Net cost today = Present Value of Future Cash Flows
    discounting using the applicable cost of funds.</p> <p>Since, cost of funds is not
    given, we assume that the interest rate on loan is the cost of funds. Thus, the
    cash flows that are required to be paid under the loan agreement are discounted
    using the same rate as the interest rate on loan.</p> <p>Therefore,&#160;net cost
    today of purchasing the appliances using loan = Amount of Loan</p> <p><em><strong>=
    $4,000.00</strong></em></p> <p><strong>(ii)&#160;Rent-to-buy</strong></p> <p>Net
    cost today = Present Value of Cash Flows</p> <p>= PV of monthly rentals + PV of
    terminal payment</p> <p>= ($85 x Cumulative PVF@7% for 4 years of monthly payments)
    + ($800 x PVF@7% for year 4)</p> <p><img src="https://studyspaceunlock.oss-ap-
    southeast-1.aliyuncs.com/7d95a2/7/7944fb7e340cbb80518ebed81b1f4326.jpg"/></p>
    <p>where, r is the annual rate of interest = 7%;&#160;n is the number of
    compoundings in a year = 12; t is the time to maturity = 4 years</p> <p>&#160;<img
    src="https://studyspaceunlock.oss-ap-southeast-1.aliyuncs.com/7d95a2/d/
    d78144d0d281b982c50025be6e13187b.jpg"/></p> <p><img
    src="https://studyspaceunlock.oss-ap-southeast-1.aliyuncs.com/7d95a2/a/
    afbeed3a011f3d107d4d90bdd26711d8.jpg"/></p> <p>= ($85 x 41.7602) + ($800 x
    0.76289)</p> <p>= $3,549.62 + $610.32</p> <p><em><strong>=
    $4,159.93</strong></em></p> <p><em><strong>Thus, cheapest option is to purchase all
    appliances at the store using a bank loan which has a net cost of
    $4000.00</strong></em></p></div></div></div></html>

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