Deep Excavating Inc. is purchasing a bulldozer. The equipment has a price of $106,000. Themanufacturer has offered a payment plan that would allow Deep Excavating to make 10equal annual payments of 17,999 with the first payment due one year after the purchase.The other option is that Deep Excavating can borrow $106,000 from its bank to finance thepurchase at an annual rate of 10%.Required:a) Calculate the interest that Deep Excavating will pay if it chooses the paymentplan of the supplier.b) Determine using proper calculations whether Deep Excavating should borrowfrom the bank or use the manufacturer's payment plan to pay for the equipment.
Deep Excavating Inc. is purchasing a bulldozer. The equipment has a price of $106,000. Themanufacturer has offered a payment plan that would allow Deep Excavating to make 10equal annual payments of 17,999 with the first payment due one year after the purchase.The other option is that Deep Excavating can borrow $106,000 from its bank to finance thepurchase at an annual rate of 10%.Required:a) Calculate the interest that Deep Excavating will pay if it chooses the paymentplan of the supplier.b) Determine using proper calculations whether Deep Excavating should borrowfrom the bank or use the manufacturer's payment plan to pay for the equipment.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 19P
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Question
Deep Excavating Inc. is purchasing a bulldozer. The equipment has a price of $106,000. The
manufacturer has offered a payment plan that would allow Deep Excavating to make 10
equal annual payments of 17,999 with the first payment due one year after the purchase.
The other option is that Deep Excavating can borrow $106,000 from its bank to finance the
purchase at an annual rate of 10%.
Required:
a) Calculate the interest that Deep Excavating will pay if it chooses the payment
plan of the supplier.
b) Determine using proper calculations whether Deep Excavating should borrow
from the bank or use the manufacturer's payment plan to pay for the equipment.
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