The Profit- Maximizing Manager of Big Farms Wants to Purchase

question 89

Multiple Choice

The profit- maximizing manager of Big Farms wants to purchase a large piece of farm equipment. The manager has two financing options from two different banks. Big Bank will allow the manager to make five equal payments of $22,000 at the end of each of the next five years. Best Bank will allow the manager to make a payment of $10,000 at the end of the next four years and then make a balloon payment of $72,000 at the end of the fifth year. If the interest rate is 4 percent, which of the following statements is true?

• A)The manager of Big Farms should select Best Bank's offer as the present value of the payment plan is $95,477.75, which is lower than the payment plan offered by Big Bank.
• B)The manager of Big Farms should select Big Bank's offer as the present value of the payment plan is $97,939.60, which is lower than the payment plan offered by Best Bank.
• C)The manager of Big Farms should select Big Bank's offer because the total repayment is less than the total repayment at Best Bank.
• D)The present value of the two payment plans is exactly the same, so the manager of Big Farms is indifferent between the two payment plans.