Question

Hello,

Can you please take a look at this problem and give an explanation for the correct answer? Thank you.

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 is complete but not entirely correct. PV Option 1 Option 2 Option 3 Option 4 The best alternative for Harding $ 1,180,000 $ 481,000 $ $ 1,087,425 $ 1,203,600 Option 3

Answer 1

			PV
Option 1			$11,80,000
Option 2:
$481,000 + $98,000*PVAF(8%,10 years)
$481,000 + $98,000*6.71
$481,000 + $657,580			$11,38,580
Option 3:
$162,000*[PVAF(8%,9 years)+1]
$162,000*(6.25+1)
$162,000*7.25			$11,74,500
Option 4:
$1,770,000*PVIF(8%,5 years)
$1,770,000*0.68			$12,03,600
The Best alternative is Alt. 2 as the cost is least in that option 2
Note:There might be some approximation error due to rounding off