COMPOUND INTEREST Q Ahmed has two payment plans to buy a car

COMPOUND INTEREST Q!- Ahmed has two payment plans to buy a car Payment plan 1: pay AED 135,000 cash now Payment plan 2: pay AED 25,000 now, AED 50,000 in one year, and AED 85,000 in three years Interest is 10% compounded annually. Which payment plan should Ahmed choose? Explain why.

Solution

The plan with lowest present cost will be chosen because it will be the cheapest and least expensive

Plan 1: Present value = 135000

Plan 2: Present value = 25000 + 50000(1+10%)^-1 + 85000(1 + 10%)^-3 = 134,316.30

Since plan 2 is less expensive it should be selected.