Question

Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine...

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 $1and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. Pay $1,080,000 in cash immediately.
2. Pay $481,000 immediately and the remainder in 12 annual installments of $75,000, with the first installment due in one year.
3. Make 12 annual installments of $132,000 with the first payment due immediately.
4. Make one lump-sum payment of $1,750,000 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.)

Homework Answers

Answer #1
PV
Option 1 $10,80,000
Option 2:
$481,000 + $75,000*PVAF(8%,12 years)
$481,000 + $81,000*7.53608
$481,000 + $610,422.48 $10,91,422
Option 3:
$132,000*[PVAF(8%,11 years)+1]
$132,000*(7.13896+1)
$132,000*6.53705 $8,62,891
Option 4:
$1,750,000*PVIF(8%,6 years)
$1,750,000*0.63017 $11,02,798
The Best alternative is Alt. 3 as the cost is least in that option 3
Note:There might be some approximation error due to rounding off
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