Question

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $2,458,000, or it can make annual payments of $336,800 for 15 years. Click here to view factor tables Payments must begin now and be made on the first day of each of the 15 years, what payment method would you recommend assuming an expected effective-interest rate of 11% during the future period

Answer 1

Answer: Make immediate payment of $2,458,000

Explanation:

The recommended payment option will be the one with a lower present value.

It can make a payment of $2,458,000 now which would be the PV of the first option.

Second option is a constant amount for 15 years to be paid on the first day of every year making it an annuity due.

Present Value of annuity due;

= Annuity * Present value factor of Annuity due, 15 periods, 11%

= 336,800 * 7.9819

= $2,688,303.92‬

Lower and recommended option is to make immediate payment of $2,458,000.