Question

Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning: ((FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Pay $1,080,000 in cash immediately. 2.Pay $400,000 immediately and the remainder in 10 annual installments of $82,000, with the first installment due in one year. 3. Make 10 annual installments of $140,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,610,000 five years from date of purchase. Required: Determine the best alternative for Harding, assuming that Harding can borrow funds at a 8% interest rate. (Round your final answers to nearest whole dollar amount.)

Answer 1

Answer:

The best financial option would be the second as his PV is the lowest

Explanation:

we will calcualte each option present value using the annuit formula

$PTM \times \frac{1-(1+r)^{-time} }{rate} = PV$

second option

PTM 82,000

time 10 years

rate 0.08

$82000 \times \frac{1-(1+0.08)^{-10} }{0.08} = PV$

PV $550,226.6747  + 400,000 = 950,226

third option (annuity-due)

PTM 140,000

time 10years

rate         0.08

$140000 \times \frac{1-(1+0.08)^{-10} }{0.08} (1+0.08)= PV$

PV $1,014,564.3075

fourth option (lump sum present value)

$\frac{Nominal}{(1 + rate)^{time} } = PV$  

Nominal: 1,610,000.00

time      5 years

rate  0.08

$\frac{1610000}{(1 + 0.08)^{5} } = PV$  

PV   1,095,738.95