In this scenario, the handler company receives a $21.85 discount (1% of the amount borrowed) for settling their payment within 15 days. Consequently, rather than sending the full sum of $2,185 to Ellen Co., they will only remit $2,163.15, which is $21.85 less than the initial amount due, taking advantage of the 1% discount.
Answer:
The solution is a. 14.33.
Explanation:
We employ the net present value (NPV) analysis to evaluate the two scenarios.
+ The NPV for the lifetime subscription is $(850)
+ The annual subscription has an NPV calculated as - 85 - [ 85/6% * [ 1 - 1.06^(-n) ], where n represents the years the subscriber is expected to live.
In order for the lifetime subscription to be more advantageous, its NPV must exceed that of the annual subscription, which gives us:
85 + [ 85/6% * [ 1 - 1.06^(-n) ] > 850 <=> 1 - 1.06^(-n) > 0.54 <=> 1.06^(-n) < 0.46 <=> -n < -13.33 <=> n > 13.33.
This indicates that the subscriber needs to live beyond 14.33 years (13.33 + 1 additional year for the next subscription) for the lifetime subscription to be the wiser choice.
Thus, option a is correct.
