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 $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.)

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