Dunn Drafting Company is considering expanding its business by purchasing new equipment. Because of constraints on how much the company can spend for new equipment, the president wants to make sure that the company enters into the best possible deal. Dunn Drafting has four options for paying for the new equipment.

Make a lump-sum payment of $240,000 today.

Make a lump-sum payment of $500,000 eight years from now.

Make a lump-sum payment of $600,000 ten years from now.

Make payments of $50,000 at the beginning of each year for six years. The first payment is due now.

Compute the present value of each option. Assume that the relevant interest rate is 12 percent.

If you were the president of Dunn Drafting Company, which option would you select?

Would your answer to (b) change if the annual interest rate was 8 percent? If so, which option would you now prefer?