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 Panning Machine Corporation. Several financing alternatives have been offered by Panning: (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.) Pay $1.080.000 in cash immediately. Pay $481,000 immediately and the remainder in 12 annual installments of $75,000, with the first installment due in one year. Make 12 annual installments of $132,000 with the first payment due immediately. Make one lump-sum payment of $1,750,000 six years from date of purchase. Determine the present value, assuming that Harding can borrow funds at an 8% interest rate. Determine the best alternative for Harding. Option 1 Option 2 Option 3 Option 4

Explanation / Answer

Option 2

Best alternative is Option 2 since the Net present value in terms of outgo is the lowest.

Option 1 Make all the payment of today Present value of the offer will be the amount paid 1080000 *1 = 1080000 Total Outflow/NPV 1080000

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