| Course | BUS 550 Business Finance |
|---|---|
| Module | Module 2 |
| Paper type | Time value of money analysis |
| Length | About 1,033 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 550 Module 2
Cash, Installments or a Lease: Putting Three Equipment Offers on the Same Footing With Present Value
Student Name
MBA Program, Aspen University
BUS 550: Business Finance
Instructor Name
Month Day, Year
Cash, Installments or a Lease: Putting Three Equipment Offers on the Same Footing With Present Value
Heartland Grounds Care, a composite company in the Kansas City area, needs new equipment before spring: four commercial mowers, a skid steer and a trailer, priced at $180,000. The dealer has offered three ways to pay. The company can pay $180,000 in cash. It can take dealer financing at 4.9% a year for five years, with 60 monthly payments of $3,389 starting next month. Or it can lease the equipment for five years at $3,250 a month, with an option to buy it for $20,000 at the end. The owner leans toward the lease because its monthly payment is lowest. This paper uses the time value of money to compare the options.
Why Money Has Time Value
Fisher (1930) explained interest as the result of two forces: people's impatience, their preference for consumption sooner rather than later, and the opportunity to invest resources today to produce more tomorrow. Since cash on hand can earn a return or retire interest-bearing debt, a sum received now beats the same sum received in five years. Comparing payment streams by simply adding them ignores this and favors options that push payments into the future.
Choosing the Discount Rate
To compare the options, each must be converted to its value today using a discount rate that reflects Heartland's opportunity cost of money. The company has a bank line of credit at 9% a year with a balance outstanding. Any cash not spent on equipment would go toward that line, saving 9% interest. Brigham and Ehrhardt (2020) explain that the appropriate discount rate for comparing financing alternatives is the rate the firm would otherwise earn or pay on its funds, so 9% is used, converted to 0.75% a month for monthly payments.
Converting Each Option to Present Value
Paying cash costs $180,000 today; its present value is $180,000.
The dealer loan's 60 monthly payments of $3,389 form an annuity. Discounting each payment at 0.75% a month and adding them gives a present value of about $163,300. The loan costs the company less, in today's dollars, than paying cash because the dealer's 4.9% rate is below the 9% the company would otherwise pay on its own borrowing.
The lease's 60 payments of $3,250 have a present value of about $156,600 at 0.75% a month. The $20,000 buyout at the end of five years has a present value of about $12,800. Together, owning the equipment through the lease costs about $169,300 in present value.
The dealer loan is the least expensive in present value, about $6,000 cheaper than the lease with buyout and $16,700 cheaper than paying cash.
| Option | Payments | Present value at 9% a year |
|---|---|---|
| Cash now | $180,000 today | $180,000 |
| Dealer loan at 4.9% | 60 monthly payments of $3,389 | $163,300 |
| Lease with buyout | 60 monthly payments of $3,250, then $20,000 | $169,400 |
Why the Loan Beats Cash
The result surprises many owners, because paying cash avoids interest entirely. The explanation is that paying cash is not free: the $180,000 would come from money that otherwise reduces a 9% credit line, so using it costs the company 9% a year in interest it would have saved. The dealer's 4.9% loan is a subsidy, financed by the manufacturer to sell equipment, and borrowing at 4.9% while avoiding 9% borrowing leaves the company better off. The present value calculation captures this precisely: discounting the loan payments at 9% values them below the $180,000 they repay.
Checking the Calculation
A reader can verify the loan figure with a financial calculator: 60 periods, an interest rate of 0.75% per period, a payment of $3,389 and a future value of zero produce a present value of about $163,300. The lease figure combines the same calculation for 60 payments of $3,250 with the buyout, a single amount of $20,000 discounted for 60 months at 0.75%. Stating the inputs this way lets anyone reproduce the table and test other rates.
Testing a Different Rate
If Heartland could pay off its credit line and its next best use of cash earned only 6% a year, the present values would change. At 0.5% a month, the loan's payments are worth about $175,300 and the lease with buyout about $182,900. The dealer loan remains cheapest, though its advantage over paying cash shrinks to about $4,700, and the lease becomes more expensive than paying cash.
The ranking of the loan first holds at both rates because the loan's rate, 4.9%, is below either opportunity cost.
| Option | Present value at 6% a year |
|---|---|
| Cash now | $180,000 |
| Dealer loan at 4.9% | $175,300 |
| Lease with buyout | $182,900 |
Why the Low Monthly Payment Appeals
The owner's preference for the lease reflects a common pattern. Frederick et al. (2002) reviewed decades of research on time discounting and found that people's preferences across time are often inconsistent, with heavy weight on the present and rates of discounting that vary with the size and timing of amounts. A lower monthly payment feels cheaper even when the total cost, properly discounted, is higher. Present value corrects this by placing every payment on the same footing.
Other Considerations
The lease includes no maintenance, so it offers no service advantage. The loan leaves the company owning the equipment from the start, which allows it to sell or trade a machine if its needs change. Both financing options preserve cash for the busy spring season, when payroll rises before customers pay, which paying cash would not.
Recommendation
Heartland should take the dealer loan at 4.9%. It has the lowest present value cost at any reasonable discount rate, preserves cash for the spring, and gives the company ownership from the start. The company should confirm that the loan carries no prepayment penalty and that the quoted rate does not depend on buying an extended warranty, which would change the comparison.
Conclusion
Adding up payments made the lease look attractive because its monthly amount was lowest. Discounting each option at the company's 9% cost of borrowing shows that the dealer's subsidized loan is cheapest in today's dollars, cheaper even than paying cash. The time value of money turned three offers that looked different into numbers that can be compared directly.
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.
Fisher, I. (1930). The theory of interest. Macmillan.
Frederick, S., Loewenstein, G., & O'Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2), 351-401. https://doi.org/10.1257/002205102320161311
Reading the BUS 550 Module 2 assignment instructions
The Aspen catalog includes the time value of money among the core subjects of BUS 550, and the matching module has students put discounting to work on an actual choice about money. The details are in your classroom's directions; this example compares financing options for one purchase. Lay out the cash flows of each option by period. Explain why money in hand now outranks the same sum promised later. Choose a discount rate and justify it from the decision-maker's opportunity cost. Convert each stream to present value, showing the method so the reader can follow. Compare the results and test how sensitive they are to the rate. Address any non-financial factors, such as flexibility. Finish with a clear recommendation.
How this BUS 550 Module 2 example is built
The paper opens with Heartland Grounds Care's dealer quote and three offers. A section on Fisher's The Theory of Interest explains time preference and investment opportunity as the sources of interest. The discount rate is set at 9%, the rate on the company's bank line, which is what any cash saved would earn by paying down that line. A table converts each option: cash at $180,000; the dealer loan's 60 payments of $3,389 at a present value of about $163,000; and the lease's 60 payments of $3,250 plus a $20,000 buyout at about $169,500. A second table repeats the calculation at 6%. Frederick, Loewenstein and O'Donoghue's Journal of Economic Literature review explains why people often prefer smaller payments spread over time. The recommendation is the dealer loan, with conditions.
BUS 550 Module 2 rubric: what earns full marks
Time value papers in an MBA finance course are marked on correct setup of cash flows, a justified discount rate, accurate present value calculations and a decision that follows. This example lists each option's payments by timing and amount, explains the choice of 9% as the company's opportunity cost of funds and shows present values in a table the grader can verify with a financial calculator. Testing a second rate shows how conclusions depend on assumptions. Fisher's The Theory of Interest grounds the concept, Brigham and Ehrhardt's text supplies the annuity formulas, and Frederick, Loewenstein and O'Donoghue's Journal of Economic Literature article explains why intuition about payments often misleads. The recommendation addresses the subsidized loan rate directly, which shows understanding of why a cheap loan can beat paying cash.
Common BUS 550 Module 2 mistakes, and how to avoid them
A common error in Module 2 is comparing options by adding up payments without discounting, which treats a dollar in year five as equal to a dollar today. Discount every cash flow. Another is choosing a discount rate without explanation; the right rate is the decision-maker's opportunity cost, such as what cash could earn or the rate it would otherwise pay to borrow. Be careful with timing: payments at the start of each period are worth more than payments at the end. Use monthly rates and periods when payments are monthly. Show at least one calculation in full. Test a second rate. Finally, consider factors beyond present value, such as maintenance included in a lease or the flexibility to return equipment, and say whether they change the answer.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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BUS 550 Module 2 questions, answered
What does BUS 550 Module 2 usually ask for?
Aspen's BUS 550 covers the time value of money in this module, so applying present and future value to a business or financing decision is typical. Follow your classroom prompt.
What is present value?
The value today of a future amount or stream of payments, found by discounting each payment at a rate that reflects the opportunity cost of money.
Which discount rate should I use?
The rate that reflects the decision-maker's opportunity cost, such as the return available on alternative investments or the cost of borrowing.
Where can I find a free BUS 550 Module 2 sample paper?
The complete analysis is above: a landscaping company comparing cash, a dealer loan and a lease with present values in a table, a second discount rate and a recommendation.
Can borrowing be cheaper than paying cash?
Yes, when the loan's rate is below the buyer's opportunity cost of funds, as with subsidized dealer financing, its present value cost can be less than the cash price.