An electrical retailer offers you two payment options:
1. a lump sum payment in 10 years from today
2. A payment of $500 in 5 years followed by $1000 in 15 years
You can earn 6%pa on any savings over the next 15 years
a) What is the maximum amount you would pay for Option A?
b) You are now offered a 3rd option - pay $850 now and clear debt
Should you accept this? give reasons
c) What assumptions are you making and should you understand in making you decision?
This solution shows step-by-step calculations to determine the present value and maximum amount that would be paid for both options. It also assesses the third option of paying $850 now and clearing debt.