Kamal Enterprises Ltd., a garment manufacturer in Mumbai, India, is negotiating to purchase a fully automated sewing machine. This machine can be programmed to sew and is expected to reduce manufacturing time significantly.

The machine’s inventor has offered Kamal the choice of either a one-time payment of 1,500,000 today or a series of five year-end payments of 385,000.

a. If Kamal has a cost of capital of 8%, which form of payment should it choose?

b. What yearly payment would make the two offers identical in value at a cost of capital of 8%?

c. Would your answer to part a of this problem be different if the yearly payments were made at the beginning of each year? Show what difference, if any, that change in timing would make to the present value calculation.

d. The after-tax cash inflows associated with this purchase will be 240,000 per year for the next 14 years. Will this factor change the firm’s decision about how to fund the initial investment?