Formulas for Green Spaces Thanks

8. Suppose that a marketing manager for a retail furniture company proposes a sale. Customers can buy now but don't have to pay for their furniture purchase for two years. From a time value of money perspective, selling furniture at full price with payment in two years is equivalent to selling furniture at a sale, or discounted price with immediate payment. If interest rates are 7.5 percent per year, what is the equivalent sale price of a $1,000 sleeper-sofa when the customer takes the full two years to pay for it? Refer to Example 4-3 on page 125. 46 47 Future payment to the furniture company (Fv) 48 Number of years until payment (Nper) 49 Interest rate (Rate) 50 Number of payments before future payment 51 Discounted price equivalent (Use PV function) 52 Discounted in percent 1,000 2 7.5% 0 Solution: $865.33 Solution: 13.47% Lesson: The furniture company should be willing to sell the furniture for $865.33 cash today, or on credit for an expected $1,000 payment in two years. The value of each payment is technically the same. However, this does not consider the risk to the company of customers not making their promised future payment. The company could offer customers either a discount or credit using numbers from this calculation 54 9. Timber, Inc. lost a lawsuit in a business dispute. The judge ordered the company to pay the plaintiff $175,000 in one year. Timber's attorney advises Timber to appeal the ruling. If so, Timber will likely lose again and will still have to pay the $175,000. But by appealing, Timber moves the $175,000 payment to year 2, along with the attorney's fee of $20,000 for the extra work. The interest rate is 7 percent. What decision should Timber make? Refer to Example 4-4 on page 128. 55 56 To compare, move the payment in year 2 to year 1, and compare its present value to the $175,000 payment now required 57 Payment ordered by judge to be paid now 175,000 58 Attorney's fee to appeal 59 Interest rate (opportunity cost of funds) 60 Year to delay payments 61 Interim payment 20,000 7% 1 Solution: $195,000 62 Future payment if appeal made Solution: $182,243 63 Present value of future payment if appeal made