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 $1,160,000 in cash immediately. 2. Pay $461,000 immediately and the remainder in 10 annual installments of $94,000, with the first installment due in one year. 3. Make 10 annual installments of $156,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,730,000 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.) PV PV Option 1 Option 2 Option 3 Option 4 The best alternative for Harding

Answer 1

We need to find the present value of each alternative.

The one with lease cost is the best alternative for Harding

Accordingly answer is given below

Present value factor of 8% is used

Option 1 Option 2 Option 3 Option 4 Present value $1,160,000 $1,091,748 As per WN below $1,130,515 ($156,000 * 7.2469) $1,177,409 (1,730,000 * 0.6806) The best alternative for Harding is Option 2 Working notes: Option 2 Immediate 10 instalments $461,000 $630,748 ($94,000* 6.7101) $1,091,748 Total