Question

1) Andras is graduating and moving from Pittsburgh, so he agrees to sell his car to his friend Keela. Andras accumulated a lot of credit card debt as a student, and he intends to use the money from selling his car to pay down his credit card debt, which has a 15% APR (interest rate). Keela has a part-time campus job that she has used to pay for her meal plan, but she can use these earnings to pay for the car and then increase her student loan amount to pay for her meal plan. Her student loan has a 6% APR (interest rate). Andras and Keela are considering whether Keela will pay for the car entirely up front with a single payment of $2650 now or in two installments of $1400 now and another $1400 one year from now. What is the NPV of each payment plan for each of them? Which payment plan do you expect they will agree on?

Answer 1

Andras is selling the car for a value of $2650 now
If Andras is accepting the payment in two installments of $1400
now and another $1400 after one year. Then the NPV is as follows:
Year	Flow	Present value	Computation
0	1400	1400
1	1400	1217	1400/1.15
		2617
I Suggest for Andras to receive the full amount now and pay his dues
Analysis of Keela Payments Plans
If Keela paid now full amount:
The out flow is	$2,650
Payment of Interest	$159.00
	2809
If Paid in two installments
Now to be paid	1400
Interest on the above@6%	$84.00
	$1,484.00
PV of outflow after one year	1320.7547	1400/1.06
	$2,804.75
For Neela the amount paid in installemts is profitable
Neela is getting only $5(approx) will get benefit if opts to pay in installments
Andras is getting the profit of $ 33(2650-2617) if opt for the receiving full amount
now. So I prefer payment the full amount now.