Question
The Automotive Air Charter Company (AACC) is considering two different options for repayment of a loan. The first option requires payments of $40,000 at the
The Automotive Air Charter Company (AACC) is considering two different options for repayment of a loan. The first option requires payments of $40,000 at the end of each of the next four years. The second option requires $20,000 at the end of the first year, $30,000 at the end of the second, $50,000 at the end of the third, and $70,000 at the end of the fourth. Thus the second option requires the payment of an extra $10,000 in all, but it allows AACC to make smaller payments in the first two years. Which option should the company choose if the hurdle rate is 12 percent? 16 percent?
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