I have an accounting assignment which I am very confused about how to do the quantitative analysis. It asked students to analyze among the 4 financing options. Each option has provided different conditions (length of financing, interest rate, number of period) but given there is no discount rate provided, I had no clue how to compare among those options. It would be much appreciated if you could give a hint for it!

Downtown Doctor's Groups (DDG) is a private clinic located in the heart of downtown Ottawa.They offer a range of services from basic family medicine to x-rays, blood tests and scans.In an effort to expand their services, they decided to acquire an MRI machine at a cost of $900,000. In addition to the machine, delivery, installation and initial testing of the machine is expected to cost $20,000.

DDG is enthusiastic about this purchase as the initial estimates made by Marita indicated that they could likely make $60,000 per month in additional service revenue from the use of the machine and DDG intends to use the machine for 8 years.

DDG currently has $95,000 cash on hand, however, they estimate that they need to keep an average of $30,000 cash on hand to handle the day to day working capital needs of the clinic.

DDG was founded by two sisters, Dr. Marita and Dr. Eva twelve years ago.At its inception, both sisters invested in the business in exchange for a 40% stake (each) of the common voting shares.The remaining 20% was purchased by Mr. Bajaj, a real estate investor who wanted to diversify his investments.

In order to fund the MRI machine, Dr. Marita has done some initial research on financing options and she has come to you to help her analyze the various options and make a recommendation.

Required:

Provide a quantitative comparison of the four financing options outlined below.Ensure to show your computations to get part marks.Your report should also include a qualitative analysis where the pros and cons of each options are discussed.

Your report should include a conclusion as to which option you believe is best for DDG.

Summary of Financial Options Available to DDG

Option 1:

Burnaby Investment Bank has offered to lend DDG $900,000 with an annual interest rate of 4.5%.The loan is to be repaid in equal monthly installments of principal and interest over the 9-year life of the of the loan.

The Burnaby bank is requiring first rank on the MRI machine.However, due to rapid changes in medical technology, Burnaby has also asked for a personal guarantee from both Marita and Eva for the machine, in case the machine would become obsolete before the end of the 9-year loan.

Option 2:

Mr. Bajaj has offered to inject more money into DDG.He has been very satisfied with the returns that the clinic has provided so far, and he also understands the potential of the added business with the MRI machine.

Mr. Bajaj has offered to invest $840,000 in the business in exchange for additional shares.The agreement put forward would bring his ownership to 30%.The sisters' remaining ownership would be diluted equally.

Option 3:

Fragment Technology, the manufacturer of the medical equipment, has offered to lease the equipment to DDG for a period of 6 years with quarterly payments of $34,000.The payments are due on the first day of each quarter, starting with the first payment due at inception of the lease.

The lease contract identifies that DDG has an option to purchase the machine at the end of the 6 years for a total of $165,000.This doesn't represent a bargain purchase option, but rather the best estimate for the price of a 6-year-old MRI machine.

Under this option, Fragment Technology would take care of the delivery, installation and initial testing, so there would be no need for DDG to pay for these expenses.

Option 4:

The Cambridge Bank offered to fund 95% of the cost of the MRI equipment.The loan would carry an interest charge of 4.75% and the yearly blended payments (interest and principal) would amount to $196,120.67 per year.

The Cambridge Bank required a first rank on the MRI equipment and for the company to maintain a D/E ratio of no more then 2.

DDG currently has a D/E ratio of 1.29 (Debt = 1,800,000 / 1,400,000)