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. How much total interest will Blue pay on this payment plan? Total interest? 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

Bulldozer price = $95,100

11 Monthly payments = $13,321.27

Total cash outflow = $13,321.27 * 11

= $146,533.97

Total interest amount = $146,533.97 - $ 95,100

= 51,433.97

Therefore, the total interest paid on this manufacturer's payment plan is $ 51,433.97.

If, he borrow the amount from the bank at an annual rate of 7% assuming the periodicity of the borrowing is as same as the manufacturer payment plan i.e 11 years

Total interest = $95,100 * 7% * 11

= $73,227

Total outflow would be $95,100 + $ 73,227

= $168,327

According to the above analysis Blue Excavating Inc. should finance the bulldozer using the manufacturer's payment plan because the cash outflow in this case is less than the cash outflow from the borrowing the same.