Question

Brief Exercise 3-27 As CFO of a small manufacturing firm, you have been asked to determine the best financing for the purchase of a new piece of equipment. The vendor is offering repayment options of $12,000 at the end of each year for five years, or no payment for two years followed by one payment of $44,000. The current market rate of interest is 8%. Calculate present value of both options. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 2 decimal places, e.g. 5,275.25.) Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Present Value Option 1 Option 2 Which option would you recommend?

Answer 1

	Present value
Option 1	$47,912.52
Option 2	$37,722.96

Option 2 is recommended because it has lower present value

Calculations:

Option 1:

Present value =$12,000 x 3.99271 Present value annuity factor at 8% for 5 years = $47,912.52

Option 2:

Present value = $44,000 x 0.85734 Present value factor at 8% for 5 years = $37,722.96