payment made evenly throughout the period is the same as making the total payment in

B

bselgamal

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American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's jackets during the next year. Reese Zipper Company has quoted a price of $. 60 per zipper. American would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule. In order to ensure availability of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at eight percent, the company's opportunity cost of purchasing the 60,000 units at the beginning of the year is?
a. $ 1,500
b. $ 1,320
c. $ 2,640
d. $ 1,440

Choice "b" is correct. Cost to purchase 60,000 zippers: 60,000 × .60 = $ 36,000 The opportunity cost is the forgone interest on the $ 33,000 cash payment (the first $ 3,000 would have had to be paid in either case). The $ 33,000 cash payment ( made evenly throughout the period :-? !!!) is the same as making the total payment in the middle of the period.


my question is : The answer says “…payment made evenly throughout the period is the same as making the total payment in the MIDDLE of the period.” The middle of the period means divide by 2 ,,,,,,,,why????? why making equal payments treated as waited average ?? Why should we consider making payments in the middle of the period???


thanks
 
The interest you lose on the money you take out of the bank to make the very first month (rather than the middle) is offset by the interest you earn on the money you save until the very last. The interest you lose on the money you take out of the bank to make a payment on the second month is offset by the interest you earn on the money you save until the next to last month, etc.
 
thanks HallsofIvy for your replay ,,

but how this mean average ? how it like we divide by 2 ?! ,,i don't understand how :( ,,,,sorry
 
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