Chapter 5, Problem 5.3P

Analysis of alternatives

• LO6–3, LO6–7

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:

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.