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Analyze & Calculate the Better of Two Options for a Dishmachine

I have to calculate the two options and find out which one is the better choice.

Dishmachine is $11,000.

Option 1:

To buy the dishmachine directly, you will have to pay more than $11,000 after three years because the cost of the dishmachine may increase over the period of next three years. Use the Internet or other reliable resources to determine how much money you will need to invest today in a certificate of deposit (CD), earning 5 percent interest, per annum to have $13,000 for the replacement of your dishmachine in next three years. For this option you will need to calculate the present value amount of $13,000 on an investment that earns 5% per year for three years.

Option 2:

For buying the dishmachine through the vendor's credit payment plan, you would be charged 11 percent interest over three years on the $11,000 cost of the dishmachine while making monthly installment payments. For this option you will need to calculate the total future amount that will be paid based on an initial amount of $11,000 for the dishmachine and 11% interest for the duration of the loan which is three years.

Analyze the monthly payments, total cost, total interest paid, working capital considerations, PV, and FV elements to consider in this financial decision.

Solution Preview

See the attached Excel sheet for detailed calculations.

In Option 1, we want to find the PV of $13,000 three years from now at an interest rate of 5%. We assume the interest compounds (in the second year, for example, you get interest not only on your original investment but on the first year's interest as well). Since we earn 5% interest each year, we have 1.05 times as much each year than the previous year. If we have $13,000 after three years, we can back out how much we have after years 2, 1, and 0 (the present) by dividing by 1.05 repeatedly. We have a present value of $11,229.89, and this is how much we need to invest now to have ...

Solution Summary

The solution analyzes and calculates the better of two options for a dishmachine.

$2.19