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: (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 $1,210,000 in cash immediately.

2.   Pay $471,000 immediately and the remainder in 10 annual installments of $95,000, with the first installment due in one year.

3.   Make 10 annual installments of $157,000 with the first payment due immediately.

4.   Make one lump-sum payment of $1,740,000 five years from date of purchase.

Determine the present value, assuming that Harding can borrow funds at an 7% interest rate.

Explanation / Answer

Option 1

Cash outflow = $1210000

Option 2

Payment at t0 + 95000/cumulative discounting factor of 7% for 10 years

=471000 + (95000/1.0710)

= 471000+ 667240

= 1138240

Option 3

157000/(1+cumulative discussing factor of 7% for 9 years)

157000/(1+1.079)

1179891

Option 4

1740000/discounting factor of 7% at 5th year

= 1240596

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