Question

Harding Company is in the process of purchasing several large pleces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning: (EV 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 $1,000,000 in cash immediately. 2. Pay $420,000 immediately and the remainder in 10 annual installments of $80,000, with the first installment due in one year. 3. Make 10 annual installments of $135,000 with the first payment due immediately. 4. Make one lump sum payment of $1,500,000 five years from date of purchase. Required: Determine the best alternative for Harding, assuming that Harding can borrow funds at an 8% Interest rate. (Round your final answers to nearest whole dollar amount.) 1.000.000) Option 1 Option 2 Option 3 Option 4 The best rative for Harding

Answer 1

rate positively ..

Computation of present value
Option 1
	PV =	1000000
Option 2
	For annual installment we have to use financial calculator
	put in calculator
	FV		0
	PMT		-80000
	I		8%
	N		10
	Compute PV		$536,807
	therefore total PV of option 2 =536807+420000=					$956,807
Option 3
	For annual installment we have to use financial calculator
	put in calculator (Set the calculator at BEGIN mode)
	FV		0
	PMT		-135000
	I		8%
	N		10
	Compute PV		$978,330
	PV of option 3=			$978,330
Option 4
	PV =	1500000/(1+8%)^5
		1020875
The best option =		option 2	because it has lower present value