If hard hat company is in the process of purchasing several large pieces of equipment from machine corporation. the best alternative for Harding, assuming that Harding can borrow funds at a 7% interest rate is: Option B.
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How to find the present value?</h3>
Year 1 present value $1,120,000
Year 2
Year 2 Present value =430,000 + 81,000×(1-1.07^(-12))/0.07
Year 2 Present value = 430,000 + 81,000× 7.94268
Year 2 present value = 430,000 + 643,357
Year 2 present value =$1,073,357.59
Year 3
Year 3 present value =130,000 +130,000×(1-1.07^(-12+1))/0.07
Year 3 present value = 130,000 + 130,000× 7.49867
Year 3 present value = 130,000 + 974,827.66
Year 3 present value =$1,104,827.66
Year 4
Year 4 present value =1,600,000/(1.07^5)
Year 4 present value =$2,244,082.77
Based on the calculation Option 2 has the lowest present value and thus the best
Therefore the best alternative is option 2.
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The complete question is:
hard hat company is in the process of purchasing several large pieces of equipment from machine corporation. several financing alternatives have been offered by machine:pay $1,120,000 in cash immediately.pay $430,000 immediately and the remainder in 12 annual installments of $81,000, with the first installment due in one year.make 12 annual installments of $130,000 with the first payment due immediately.make one lump-sum payment of $1,600,000 five years from date of purchase.
Required:
Determine the best alternative for Harding, assuming that Harding can borrow funds at a 7% interest rate. (Round your final answers to the nearest whole dollar amount.)
