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Chapter 6: Question 11E (page 304)

Sosa Excavating Inc. is purchasing a bulldozer. The equipment has a price of $100, 000. T h e m a n u f a c t u r e r h a s o f f e r e d a p a y m e n t p l a n t h a t w o u l d a l l o w S o s a t o m a k e 10 e q u a l a n n u a l p a y m e n t s o f$ 16,274.53, with the first payment due one year after the purchase. Instructions (a) How much total interest will Sosa pay on this payment plan? (b) Sosa could borrow $100,000 from its bank to finance the purchase at an annual rate of 9%. Should Sosa borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?

Short Answer

Expert verified

The total interest is $62,745.3, and they should borrow from the bank to pay for the bulldozer.

Step by step solution

01

Calculation of total interest

$\begin{array}{rcl} Total Interest & = & Total payment - Equipment price \\ = & (16, 274.53 \times 10) - 100, 000 \\ = & $ 62, 745.3 \end{array}$

02

Choosing between bank or manufacturer’s plan

$\begin{array}{rcl} Present value factor & = & \frac{Equipment price}{Annual payments} \\ = & \frac{100, 000}{16, 274.53} \\ = & 6.14457 \end{array}$

The present value of the factor of 6.14457 for 10 years shows the interest rate of 10% per the table.

They should choose to borrow from the bank as the interest rate is lower.

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