Careful Electric Company is planning to purchase equipment forone of its generat
ID: 2445787 • Letter: C
Question
Careful Electric Company is planning to purchase equipment forone of its generating plants. Dealer A has offered to sell theequipment at a total cost of $ 2 million, including installation.This dealer requires a 6% return and is willing to spread thepayments over a 10- year period. Payments are to be made at the endof each year in equal installments. Dealer B is asking $ 1.8million for the same equipment and will charge an additional $50,000 for installation, to be paid when the equipment isdelivered. Payments can be spread over 10 years, made at the end ofeach year. This dealer requires an 8% return.
A. Calculate the amount of the annualpayments required by each dealer. Round to nearest wholedollar.
B. Determine the projected total cashoutflow under each option.
C. If Careful could pay cash for the newequipment, how much money (interest) would it save under eachoption?
D. Which option should be chosen?
E. Assume the equipment isacquired using the financing offered by Dealer A. How will thefinancing activities section of the statement of cash flows beaffected by these transactions in the first year?
Explanation / Answer
A Calculate Annual Payments using PMT function in Excel For Dealer A PV 2M Rate of interest required 0.06 N 10Years Annual Payments (PMT ) 271,735.92 For Dealer B PV 1.8M Rate of interest required 0.08 N 10.00 Annual Payments(PMT) 268,253.08 B Projected Cash Outflows Dealer A PMT*10 271,735.92*10 Dealer A 2,717,359.21 Dealer B 268,253.08*10 Dealer B 2,682,530.80 Add: Down Payment 50,000.00 Projected Cash OutFlow 2,732,530.80 C How much Interest would it save under each option? For A Simply subtract the Cost from the total Cash outflow obtained in B above . For B Cost - Down Payment - 2682,530.80 D Option A should be chosen since , the Present Value of Paymrnts is less. E The Financing section will show cash outflow of $2,717,351.21