Question

Windsor could borrow $108,100 from its bank to finance the purchase at an annual rate of 11%. Click here to view factor tables Should Windsor borrow from the bank or use the manufacturer’s payment plan to pay for the equipment? (Round answer to 0 decimal places, e.g. 7%.)

Answer 1

Answer: Please refer to the explanation section

Explanation:

The question is incomplete, manufacturers payment is not given in the question. we will make some assumptions in order to illustrate how to deal with questions of this nature.

The questions requires us to find a better payment plan for Windsor, we will calculate loan payments and compare with manufacturers payments plan to determine which payment Plan Windsor must take between the the options. Let us assume that the manufacturer requires Windsor to make a Payment $30000 each year for 5 years (Manufactures Payment plan)

Value of Equipment = $108100

Loan Amount (PV) = $108100

Interest rate (r) = 11%

period (n) = 5 years (assumed Period)

Loan Payments = rPV/(1 - (1 + r)^-n)

Loan Payments = 0.11 x 108100/(1 - (1 + 0.11)^-5)

Loan Payments = 11891/0.4065486710

Loan Payments = 29248.650526

Loan Payments = 29248.65

Bank Finance Options Requires Windsor to make Loan Payments of 29248.65 a year, while Manufactures Payment plan requires Windsor to pay $30000 a year.  Yearly Payments from the Manufactures Payment plan are greater than Loan yearly payments ( $30000 is greater than  $29248.65). Windsor should Borrow From the Bank