Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a paymenof $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at thebeginning of every 3 months. If the leased water heater can be bought after 10 years for $80, should Molly buy orlease the water heater, if money is compounded quarterly at 2.5%?Answer: Present value of cash payment for the water heater $2200

1) Calculation of Present Value of Decision to buy the water heater: Present Value of Decision to…

Molly needs to decide whether to buy a water heater fa of $30 at the end of every 3 months for 10 years or to e beginning of every 3 months. If the leased water heates lease the water heater, if money is compounded quarten

Molly needs to decide whether to buy a water heater fa of $30 at the end of every 3 months for 10 years or to e beginning of every 3 months. If the leased water heates lease the water heater, if money is compounded quarten

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 3P

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

Question

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Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a paymen
of $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at the
beginning of every 3 months. If the leased water heater can be bought after 10 years for $80, should Molly buy or
lease the water heater, if money is compounded quarterly at 2.5%?
Answer: Present value of cash payment for the water heater $2200

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