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Alternative Payment Options

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.


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

We will assume that she has $20000 to start with.

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, ...