Pacific Northern Corp. needs new manufacturing equipment. Two companies can provide similar equipment but under different payment plans:
a. Henderson Manufacturing offers to let Pacific Northern pay $60,000 each year for five years. The payments include interest at 12% per year. What is the present value of the payments?
b. Southern Corp. will let Pacific Northern make a single payment of $400,000 at the end of five years. This payment includes both principal and interest at 12%. What is the present value of this payment?
c. Pacific Northern will purchase the equipment that costs the least, as measured by present value. Which equipment should Pacific Northern select? Why?
Annuity Annuity of $1 at 12% for 5 years (Exhibit 12A-7)" Present Value
a. Henderson
Present Value of $1 at 12% for 5 years (Exhibit 12A-6) Present Value
b. Southern: