Question

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Exercise 6-11 Stellar Excavating Inc. is purchasing a bulldozer. The equipment has a price of $98,200. The manufacturer has offered a payment plan that would allow Stellar to make 10 equal annual payments of $17,400.00, with the first payment due one year after the purchase. How much total interest will Stellar pay on this payment plan? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Total interest $ Stellarcould borrow $98,200 from its bank to finance the purchase at an annual rate of 9%. Click here to view factor tables Should Stellar borrow from the bank or use the manufacturer’s payment plan to pay for the equipment? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 7%.) Manufacturer's rate %

Answer 1

Calculate total interest stellar will pay
Total interest paid	(17400*10)-98200
Total interest paid	174000-98200
Total interest paid	$75,800
Thus, total interest paid is $75,800
Calculate manufacturer's interest rate
Present value	17400*PV of ordinary annuity of $1
98200	17400*PV of ordinary annuity of $1
PV of ordinary annuity of $1	98200/17400
PV of ordinary annuity of $1	5.64368
Using the present value of ordinary annuity table with n = 10 years the discount factor of 5.64368 is approx applicable for i=12%
Thus, manufacturer's rate is 12%
The interest rate offerred by bank is 9% which is lower than manufacture's rate of 12%
Thus, company should opt for loan with bank