Question

Fremont LLC is looking to purchase new water chlorination equipment. A salesman from Industrial Water Services (IWS) offered water chlorination equipment for $2.1 million. IWS also said that Fremont LLC would not have to pay for the equipment now and can pay after 2 years. While the price offered by a competing saleswoman from AG Enterprises is $1.7 million to be paid now. Fremont LLC's real MARR is 12% per year, and the inflation rate is 3.9% per year. Determine which offer is better.

a. AG offer
b. IWS offer

Answer 1

Answer:

Fremont LLC

Purchase of New Water Chlorination Equipment

The better offer is:

b. IWS offer

Explanation:

a) Data and Calculations:

Offer from Industrial Water Services (IWS) = $2.1 million

Payment term = 2 years

MARR = 12%

Inflation rate = 3.9%

Present value of IWS offer = $1,563,336.34 (see below)

Present value of AG Enterprises offer = $1.7 million

N (# of periods)  2

I/Y (Interest per year)  15.9

PMT (Periodic Payment)  0

FV (Future Value)  2100000

Results

PV = $1,563,336.34

Total Interest $536,663.66