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Your employer, Huge Evil Corporation, recently purchased a large machine that will automate many of the...

Your employer, Huge Evil Corporation, recently purchased a large machine that will automate many of the functions previously done with hand tools. This will increase quality and decrease labor costs. The payment terms for the machine consisted of a zero interest loan – payments of $100,000 at the end of each of the next five years.The company would normally pay an interest rate of 8% on a loan such as this. Given that fact, you determine the value of the machine to be $399,271. Huge Evil Corporation’s top management is under intense pressure to show increased profits as a result of this purchase. Given the two choices you have for the recognition of the interest on this payment plan (straight-line and effective interest method), which method would you choose to result in greater profits in the first year?Please draft a one page memo to your boss, John Smith, detailing the two options available along with your recommendation. Please be sure to include the dollar value of the increased profit in the first year based on your recommendation.

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Interest effective interest method -outstanding x 896 Year linstilment Due |pV factor @*% Present Value straight-line Outstandin 100,000 100,000 100,000 100,000 100,000 500,000 NPV 0.92593 0.85734 0.79383 0.73503 0.68058 92,593 85,734 79,383 73,503 68,058 399,271 100,729 31,942 26,497 20,617 14,266 7,407 20,146 20,146 20,146 20,146 20,146 399,271 331,213 257,710 178,326 92,593 2 4 Total Interest 100,729 100,729 In the first year the Interest cost under effective interest method is higher by lower profit by similar amount. Hence, Huge Evil Corporations top management should ch profit by $ $11,796 in the first year $ 11,796 , hence this will lead to se Straight line method as it will result in higher

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