The Profit- Maximizing Manager of Big Farms Wants to Purchase

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.