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Home Q & A Board Other Fields Homework Help Business Economics
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Yeonjin9 Yeonjin9
wrote...
6 years ago
A university decides to offer students two different tuition options. In the first, a new freshman can pay a one-time fixed payment of $100,000. In the second, the student would make four annual payments of $29,000 each. The university would guarantee the student that there would be no tuition increase during the four years. Assume that the first of the $29,000 payments would be due at the same time that the $100,000 would be due. If the appropriate discount rate is 6%, which option should students prefer?
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wrote...
#1
Staff Member
6 years ago
There are several ways to compute the value of the four-payment option. 

First,
V-1 = $29,000PVIFA6%,4 = $100,488
V0 = V-1 x 1.06 = $106,517.

Second,
V0 = $29,000 + $29,000PVIFA6%,3 = $106,517

In either case, the single fixed payment option is better.
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