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 $1,070,000 in cash immediately.

2. Pay $400,000 immediately and the remainder in 12 annual installments of $80,000, with the first installment due in one year.

3. Make 12 annual installments of $130,000 with the first payment due immediately.

4. Make one lump-sum payment of $1,720,000 six 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.)

	PV
OPTION 1
OPTION 2
OPTION 3
OPTION 4

Answer 1

In the option 3, interest shall be computed for 11 periods as the first payment is made as on today.

For option 1, since cash is paid immediately, no interest is required to be paid.

Calculation	Calculation	Present Value
Option 1	1070000*1	$ 1,070,000.00
Option 2	400,000 + (80,000 x 7.5361)	$     1002,888
Option 3	(130,000*7.1390) + 130,000	$      1058,070
Option 4	1,720,000*0.6302	$    1083,944

Option 2 shall be selected as it is best alternative