Rearden Metal needs to order a new blast furnace that will be delivered in one year. The $1,000,000 price for the blast furnace is due in one year when the new furnace is installed. The blast furnace manufacturer offers Rearden Metal a discount of $50,000 if they pay for the furnace now.
Answer : (a.) Calculation of Amount Rearden Metal needs in order for New Blast furnace if paid after one year
Amount to be paid after one year = 1,000,000 / (1 + 0.04)^1
= 961,538.46153
Amount if Paid Today = 1,000,000 - 50000
= 950,000
Therefore Reardon should pay today as it cost less in present value Terms .
(b.) In case Reardon Does not have Cash Now ,
we will evaluate Borrowing Option and to defer payment Option :
Evalualtion of Borrowing Option :
Borrow $950,000 (1,000,000 - 50000) for one year and repay later .
Amount due after one year = 950,000 * 1.04 = 988,000
Defermnent Option
Amount to be paid after one year = 1,000,000
Therefore Reardon should opt for payment of Price today only by Borrowing the required Amount
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