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 $1,120,000 in cash immediately.
2. Pay $430,000 immediately and the remainder in 12 annual installments of $81,000, with the first installment due in one year.
3. Make 12 annual installments of $130,000 with the first payment due immediately.
4. Make one lump-sum payment of $1,600,000 five years from date of purchase.

Required:
Determine the best alternative for Harding, assuming that Harding can borrow funds at a 7% interest rate. (Round your final answers to nearest whole dollar amount.)

Tinancing alternatives nave peen offerea by Danning: (Fv of pI, PV OT $1, PVA OT 1, PVA OI $I, FVAD OT Ș1 ang PVAD OT $I) (use appropriate factor(s) from the tables provided.) 1. Pay $1,120,000 in cash immediately. 2. Pay $430,000 immediately and the remainder in 12 annual installments of $81,000, with the first installment due in one year. 3. Make 12 annual installments of $130,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,600,000 five years from date of purchase. Required: Determine the best alternative for Harding, assuming that Harding can borrow funds at a 7% interest rate. (Round your final answers to nearest whole dollar amount.) Answer is complete but not entirely correct PV Option 1 1,120,000 Option 2 998,910 976,980X Option 3 $ Option 4 1,140,784 The best alternative for Harding Option 2

Answer 1

	PV
Option 1	1120000
Option 2	1073358
Option 3	1104827
Option 4	1140784
The best alternative for Harding is:	Option 2
Workings:
Option 2:
Amount paid now	430000
Present value of an ordinary annuity of $1	7.94269	=(1-(1.07)^-12)/0.07
Present value of amount payable	643358	=81000*7.94269
Total Present value	1073358	=430000+643358
Option 3:
Present value of an annuity due of $1	8.49867	=1+(1-(1.07)^-11)/0.07
Present value	1104827	=130000*8.49867
Option 4:
Present value of $1	0.71299	=1/1.07^5
Present value	1140784	=1600000*0.71299