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# Alternative Payment Options

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Decision Case: Alternative Payment Options

Kathy Clark owns a small company that makes ice machines for restaurants and food-service facilities. Kathy knows a great deal about producing ice machines but is less familiar with the best terms to extend to her customers. One customer is opening a new business and has asked Kathy to consider one of the following options that he can use to pay for his new 20,000 ice machine.

A. Term1: 10% down, the remainder paid at the end of the year plus 8% simple interest.
B. Term 2: 10% down, the remainder paid at the end of the year plus 8% interest compounded quarterly.
C. Term 3: 0% down, but 21,600 due at the end of the year.

Required:

Make a recommendation to Kathy. She believes that 8% is fair return on her money at this time. Should she accept option (A), (B), or (C) or take the 20,000 cash at the time of the sale? Justify your recommendation with calculations. What factors other than the actual amount of cash received from the sale should be consider?

#### Solution Preview

Option A.

10% down means she pays \$2000 and have \$18000 loan as well as \$18000 left over cash. The interest is 8% and her return is 8% as well, so her investment is just enough to cover her loan. She paid a total of \$20000

Option B.

we have the same case as option A, ...

\$2.19

## Time Value: Value That Alternative Option

You are an investment manager and a client wants to know the lump sum he would need to deposit today to receive a \$35,000 supplement retirement annuity for 15 years beginning when he retires in 20 years. Looking at his investment options, you expect an average annual return on the annuity of 8 percent.

How else could you structure his payment so as not to be such a shock to his pocket book? Value that alternative option.

Here's the loaded document, "Below" (see attachment).

The Annuity Payment

Payment: \$1,289.03
Years: 15
The Annual Rate of: 8%

\$35,000.00 (The Future Value)

To make the payments easier for the retiree, I would extend the years to 20 since he is not retiring until five years later.

The Annual payment will be \$764.83

New Annuity Payment

Payment: \$764.83
Years: 20
The same Annual Rate of: 8%.

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