Problem 6-3 Analysis of alternatives [LO6-3, 6-7]

Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Pay $1,000,000 in cash immediately. 2. Pay $420,000 immediately and the remainder in 10 annual installments of $80,000, with the first installment due in one year. 3. Make 10 annual installments of $135,000 with the first payment due immediately. 4. Make one lump-sum payment of $1,500,000 five years from date of purchase. Required: Determine the best alternative for Harding, assuming that Harding can borrow funds at an 8% interest rate.

Hello I am looking for assitance - I am trying to understand the concept behind #2 to this problem. A current solution posted states:

2)

Year 0 Cash Flows $420,000 PV of $1, i=8% = 1.000 PV of Cash Flows = $420,000

Year 1 Cash Flows = $80,000 PV of $1, i=8% = 0.926 PV of Cash Flows = $74,080

I am trying to undestand what is occuring in year 1. For exaple: The difference

between $80,000 and $74,080 is due to interest, inflation, the cost of doing business with Danning

Machine Company. Why is the present value $74080 and is there a way to describe this situation in two way

using different verbiage (IE: it costs Harding Company 80,000 to cover inflation and interest ....and

Danning mahcine is borrowing you money with interest as an incentive to disuade them from keeping

their money in the bank or from investing it somwhere where they can earn money money on their investment)?