P10-A-9B-Calculating Present value

P10-A-9B-Calculating Present value

Axel needs new manufacturing equipment. Two companies can provide similar equipment but under different payment plans:

Plan A: MRE offers to let Axel pay $55,000 each year for five years. The payment include interest at 12% per year.

Plan B: Western home will let Axel make a single payment of $425,000 at the end of five years. This payment includes both principal and interest at 12%.

Requirements

1.     Calculate the present value of Plan A.

2.     Calculate the present value of Plan B.

3.     Axel will purchase the equipment that costs the least, as measured by present value. Which equipment should Axel select? Why?