Explore BrainMass
Share

# Present Value

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

On the first day of summer, Buford learns that his favorite nearby golf course will sell him a special voucher that allows him to play golf for \$10 in fees per game this year and every year for the next 7 years. The conditions are that Buford must commit now to paying for the same number of golf games each year, and must pay for each year's golf up front on the first day of each summer. Buford has a downward sloping demand curve for golf, reflecting his willingness to pay for the fees per game and for the use of golf equipment. That demand curve has finite intercepts on both the price and quantity axis. At \$10 in fees per game, Buford agrees to choose 18 games each summer, and he capture an amount of consumer's surplus equal to \$55 per summer. Some or all of the consumer's surplus captured when paying low fees will have to be used to access golf equipment. Buford can borrow and lend at an annual interest rate of 8%, with annual compounding of interest, and he is exempt from any tax considerations.

(a) Since Buford agrees to pay (\$10/game × 18 games/year =) \$180 now and again each year for the next 7 years, what is the present value of the fee payment obligations that Buford has made?

(b) Suppose we think of the \$55 per year of consumer's surplus as being experienced today and on the first day of summer for each of the next 7 years. In order to play golf, Buford must decide whether to lease or to purchase his equipment. This golf course is prepared to provide full rental use of all necessary golf equipment over the 8 seasons of play. Buford does not get any extra utility from owning or renting any of this equipment, he just wants to be able to play the game. Given what we know about Buford, what is the largest amount of money, expressed on a present value basis, that Buford would pay to rent golf equipment for these eight golf seasons?

(c) Alternatively, the golf shop will sell Buford the necessary equipment with a guarantee to repurchase it from him eight years from today for 20% of today's purchase price. What is the largest amount of money Buford should pay to purchase golf equipment that comes with this re-purchase guarantee?