Careful Electric Co. is planning to purchase equipment for one of its generating
ID: 2382596 • Letter: C
Question
Careful Electric Co. is planning to purchase equipment for one of its generating plants. Dealer A has offered to sell the equipment at a total cost of $2 million, including installation. This dealer requires a 6% return and is willing to spread the payments over a 10 year period. Payments are to be made at the end of each year in equal installments.
Dealer B is asking $1.8 million for the same equipment and will charge an additional $50,000 for installation, to be paid when the equipment is delivered. Payments can be spread over 10 years, made at the end of each year. This dealer requires and 8% return.
Required
Calculate the amount of the annual payments required by each dealer. Round to nearest whole dollar
Explanation / Answer
Using the formula for PMT in excel- Dealer A will require $271,735.92 per year for 10 years (=PMT(.06,10,-2000000,0) Dealer B will require $275,704.55 per year for 10 years (=PMT(.08,10,-1850000,0) Projected Cash Outflow(not the discounted cash outflow) if bought from Dealer A will be $271,735.92*10 = 2,717,359.10 Dealer B will be $275,704.55*10 = 2,757,045.50 If Careful could pay cash - Money saved on interest if bought from Dealer A = $2717359.10-$2000000 = $717,359.10 Dealer B =(NNN) NNN-NNNN50-$1,850,000 = $907,045.54 Buying from Dealer A is better as the payment over 10 years will be lesser as compared to buying from Dealer B. Financing activities section of the cash flow - Under US GAAP, noncash activities may be disclosed in a footnote or within the cash flow statement itself. Noncash financing activities may include purchase of asset via a loan.