Alternative Payment Options

Kathy Clark owns a small company that makes ice machines for restaurants and food-service facilities. Kathy knows a great deal about producing ice machines but is less familiar with the best terms to extend to her customers. One customer is opening a new business and has asked Kathy to consider one of the following options that he can use to pay for his new $20,000 ice machine.

a. Term 1: 10% down, the remainder paid at the end of the year plus 8% simple interest

b. Term 2: 10% down, and $1,800 each quarter for 3 years

c. Term 3: $0 down, but $21,600 due at the end of the year

Required:

Make a recommendation to Kathy. She believes that 8% is a fair return on her money at this time. Should she accept option (a), (b), or (c) or take the $20,000 cash at the time of the sale? Justify your recommendation with calculations. What factors other than the actual amount of cash received from the sale should you consider?