Noninterest-bearing debt While reading a recent issue of Health & Fitness a trad

Question

Noninterest-bearing debt While reading a recent issue of Health & Fitness a trade journal, Brandon Wilde noticed an ad for equipment he had been seeking for use in his business. The ad offered oxygen therapy equipment under the following terms: Model BL 44582 $204,000 zero interest loan Quarterly payments of $17,000 for only 3 years Model BL 44582 $204,000 zero interest loan Quarterly payments of $17,000 for only 3 years The ad captured Wilde's attention, in part, because he recently had beenslconcerned that the interest charges incurred by his business were getting out of line. The price, though, was somewhat higher than prices for this model he had seen elsewhere. Required Advise Mr. Wilde on the purchase he is considering assuming the following separate scenarios: (1) (2) the market rate of interest at the time for this type of transaction is 12% (annual rate). the cash price of the equipment is $150,000

Explanation / Answer

under Scenario 1 -

Calcualtion of Present value with market rate of interest at the time for this type of transaction is 12%(annual rate) -

Present value of annuity = periodic payment*[1-(1+i/t)^(-n*t)]/(i/t)

where - i - interest charges

n - no. of periods of periodic payment

t - no. of compounding in a year

put the value in question we get,

= 17000*[1-(1+0.12/4)^(-3*4)]/(0.12/4)

= 17000[1-0.70138)/0.03

= 17000*0.29862/0.03

= 17000*9.954004

= 169218.1

scanerio 2 - the cash price of the equipement is 150000.

Mr. wilde would go for cash purchasing for this equipment as the seller earn more than 12% interest charges. The result can be seen by comparing both the present values.

Please comment in case of further clarification.

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