Harding Company is in the process of purchasing several large pieces of equipmen

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: 1. Pay $1,080,000 in cash immediately. 2. Pay $411,000 immediately and the remainder in 10 annual installments of $89,000, with the first installment due in one year. 3. Make 10 annual installments of $151,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,680,000 five years from date of purchase.

Required: a. Assuming that Harding can borrow funds at an 9% interest rate, determine the present value. (Use PV of $1, PVA of $1, and PVAD of $1) (Round "PV Factors" to 5 decimal places and final answers to the nearest dollar amount.) Alternative PV

1 $

2 $

3 $

4 $ b.

Which is the best alternative for Harding? Alternative 1 Alternative 2 Alternative 3 Alternative 4

Explanation / Answer

1. Pay $1,080,000 in cash immediately.

Present Value = $ 1,080,000

2. Pay $411,000 immediately and the remainder in 10 annual installments of $89,000, with the first installment due in one year.

Present Value = 411000 + 89000*PVA(9%,10)

Present Value = 411000 + 89000*6.41766

Present Value = 982,172

3. Make 10 annual installments of $151,000 with the first payment due immediately.

Present Value = 151000*PVAD(9%,10)

Present Value = 151000*6.99525

Present Value = 1,056,283

4. Make one lump-sum payment of $1,680,000 five years from date of purchase.

Present Value = 1680000*PV(9%,5)

Present Value = 1680000*0.64993

Present Value = 1,091,882

Answer

1 $ 1,080,000

2 $ 982,172

3 $ 1,056,283

4 $ 1,091,882

b.Which is the best alternative for Harding?

Answer

Alternative 2

Note : Best alternative for Harding will be that alternative whose present value is lower among all other alternative therefore Alternative 2 is better among all

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