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:

  

Pay $491,000 immediately and the remainder in 10 annual installments of $76,000, with the first installment due in one year.

  

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.)

  

1. Pay $1,090,000 in cash immediately. 2.

Pay $491,000 immediately and the remainder in 10 annual installments of $76,000, with the first installment due in one year.

3. Make 10 annual installments of $145,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,760,000 five years from date of purchase.

Explanation / Answer

See below workings notes

Alternative:1

In case of Alternative 1, cash is paid immediately, therefore present value of Alternative 1 is $ 1,090,000

Alternative:4

PV of lump-sum payment of $1,760,000 five years from date of purchase =176000*PVF(5,9%)

=1760000*0.65

$1,144,000

Alternative PV 1          1,090,000 2              978,742 3          1,014,311 4          1,144,000

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