Moe\'s Machine Shop is planning on purchasing some new machinery. They have gath

Question

Moe's Machine Shop is planning on purchasing some new machinery. They have gathered the followng information from three different suppliers. Supplier A-$20,000 down ad $5000 at the end of each month for 12 months. Assume a relevant annual interest rate of 24%. Supplier B-One payment of $80,000 at the end of on year. Assume a relevant interest rate of 10%. Supplier C- Payments of $7,250 at the end of each month for 12 months. Assume a relevant annual interest rate of 36%. Based on the lowest present value which supplier should Moe do business with? How do I calculate?

Explanation / Answer

Present value from Supplier A = 20,000 + 5000/(1+24%/12) + 5000/(1+24%/12)^2 + 5000/(1+24%/12)^3.........5000/(1+24%/12)^12 =$72,876.71 Present value from Supplier B = 80000/1.1 =$72,727.27 Present value from Supplier C = 7250/(1+36%/12) + 7250/(1+36%/12)^2 + 7250/(1+36%/12)^3.........7250/(1+36%/12)^12 =$92,166.53 Supplier B offers the lowest present value. Moe should do business with Supplier B

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