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: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Pay $1,000,000 in cash immediately. 2. Pay $420,000 immediately and the remainder in 10 annual installments of $80,000, with the first installment due in one year. 3. Make 10 annual installments of $135,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,500,000 five years from date of purchase. Required: Determine the best alternative for Harding, assuming that Harding can borrow funds at an 8% interest rate. (Round your final answers to nearest whole dollar amount.)

Answer 1

the best option is 4 as it have the highest present value

Step-by-step explanation:

The computation is shown below:

For option 1

PV = $1,000,000

For option 2

PV = $420,000 + $80,000 × PVIFA (8% , 10)

= $420,000 + $80,000 × 6.710

= $956,800

For option 3

PV = $135,000 + $135,000 × PVIFA (8% , 9)

= $135,000 + $135,000 × 6.247

= $978,345

For option 4

PV = $1,500,000 × PVIF (8% , 5)

= $1,500,000 × 0.681

= $1,021,500

So the best option is 4 as it have the highest present value