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
- Determine the projected total cash outflow under each option.
- If Careful could pay cash for the new equipment, how much money (interest) would it save under each option?
- Which option should be chosen?
- Assume the equipment is acquired using the financing offered by dealer A. How will the financing activities section of the statement of cash flows be affected by these transactions in the first year?