Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer's proposal that Henri pay $5000 down and $8000 at the end of each of the next three years.

a. Which choice should Henri make if he can earn 3% compounded semiannually on his investments? In current dollars, what is the economic advantage of the preferred alternative?

b. Which choice should Henri make if he can earn 11% compounded semiannually on his investments? In current dollars, what is the economic advantage of the preferred alternative?

When choosing among alternative streams of cash inflows, we should select the one with the greatest economic value. When choosing among alternative streams of cash out-flows, we should select the one with the least economic value.