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 $1,180,000 in cash immediately.
2.Pay $481,000 immediately and the remainder in 10 annual installments of $98,000, with the first installment due in one year.
3. Make 10 annual installments of $162,000 with the first payment due immediately.
4. Make one lump-sum payment of $1,770,000 five 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

The best alternative for Harding will be the one that has lowest present value:

Alternative 1)

Present Value=$1,180,000

Alternative 2)

Present Value=481000+98000*PVAF(r=8%, n=10years)

=481000+98000(6.71008)

=481000+657587.98

=$1,138,587.98

Alternative 3)

Present Value=162000+162000*PVAF(r=8%, n=9years)

=162000+162000*6.24689

=162000+1011996.18

=$1,173,996.18

Alternative 4)

Present Value=$1,770,000*PVF(r=8%, n=5years)

=1770000*0.68058

=$1,204,626.6

As we can see that lowest present value is in alternative 2 ($1,138,587.98) as such it will be most favourable for M/s Harding.

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