Question

Blue Excavating Inc. is purchasing a bulldozer. The equipment has a price of $95,100. The manufacturer has offered a payment plan that would allow Blue to make 11 equal annual payments of $13,321.27, with the first payment due one year after the purchase.

Blue could borrow $95,100 from its bank to finance the purchase at an annual rate of 7%. Should Blue borrow from the bank or use the manufacturer’s payment plan to pay for the equipment? Manufacturer's rate?

Answer 1

Calculation of manufacturer rate
Period	Cash flow
0	-95,100.00
1	13321.27
2	13321.27
3	13321.27
4	13321.27
5	13321.27
6	13321.27
7	13321.27
8	13321.27
9	13321.27
10	13321.27
11	13321.27
IRR	8.00%
This is calculated in excell function as per manual formula of IRR =
(FV/PV)1/N - 1 = ($ 95,100/$13321.27)1/11 -1 = 8% and there are also other formula
like trial and error method you can calculate by any method the result will came same
Since rate calculated for manufacturer is 8% as per IRR method which is more than
Bank rate of 7%, therefor Blue should borrow the money from bank to purchase the
bulldozer.