Diamond Ltd agreed to sell some used equipment to one of its employees. Alternative financing arrangements for the sale have been discussed, and the present and future values of each alternative have been determined.

Required

(a) Diamond offered to accept a $1000 down payment and set up a note receivable that calls for four $1000 payments at the end of each of the next four years. What is the NPV of this note if it is discounted at 6 per cent?

(b) The employee agrees to the down payment but would like the note for $4000 to be payable in full at the end of the fourth year. Because of the increased risk associated with the terms of this note, Diamond would apply an 8 per cent discount rate. What is the true selling price of the equipment?

(c) Suppose the employee borrows the $5000 at 8 per cent interest for four years from a bank so that he can pay Diamond the full price of the equipment immediately. Also, suppose that Crown could invest the $5000 for three years at 7 per cent. What is the selling price of the equipment? What would be the future value of Diamonds investment?