Simone and Ana are debating the pricing strategy of several airlines. Simone argues, "When airlines restrict discounted tickets
1 answer:
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Answer:
The best alternative is alternative 2.
PV = $1138240.246 rounded off to $1138240
Explanation:
To determine the best alternative, we need to find the present value of each alternative and the alternative with the lowest present value will be the best one.
To calculate the present value of a single sum, we will use the normal present value formula,
PV = Future Value / (1+r)^t
Where,
- r is the discount rate
- t is the time in periods
To calculate the present value of alternative with equal payments over a period of time with same intervals, we will use the present value of annuity formula which is attached.
The present value of alternative 1 is already known.
The present value of alternative 2 will be calculated using the present value of annuity ordinary formula as the payments of 95000 are made at the end of each period.
PV = 471000 + 95000 * [( 1 - (1+0.07)^-10) / 0.07]
PV = $1138240.246 rounded off to $1138240
The present value of alternative 3 will be calculated using the present value of annuity due formula as the payments of 157000 are made at the start of each period.
PV = 157000 * [( 1 - (1+0.07)^-10) / 0.07] * (1+0.07)
PV = $1179891.463 rounded off to $1179891
The present value of alternative 4 will be calculated using the present value
of the sum formula,
PV = 1740000 / (1+0.07)^5
PV = $1240595.952 rounded off to $1240596
The best alternative is alternative 2.
