On Thursday, January 29, 20X2 Rick Bailey called Tom Fasbee with good news. The bank had...

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On Thursday, January 29, 20X2 Rick Bailey called Tom Fasbee with good news. The bank had committed to loan HydroQual an amount up to $275,000 (not to exceed the price paid to the dealer for two trucks) at 4.5 percent annual interest (the market rate for loans of three to four years). The loan was expected to be received on Monday, February 2 and would be repaid in four equal annual installments starting next year on February 1, 20X3. The borrowing also was to be secured by a lien on the equipment. Finally, Rick reported that a maintenance contract was in the works with a large refinery with work to begin early in March. He also hoped to win contracts from two water districts in the southern suburbs of St. Louis. The next day, Kay Mallard called Tom with a question. HydroQual had now received bids from two dealers for the planned purchase of crew trucks and equipment. Dealer 1 offered a list price of $140,000 and a discount of $20,000 per vehicle, but HydroQual would have to secure its own financing from the bank. Dealer 2 offered a list price of $129,000 and no discount, but did offer three-year financing at 1.3 percent annual interest through its manufacturer's finance affiliate. This loan required repayment in three equal annual installments. Kay stated that neither she nor Jerry Loos had been able to determine which is the better deal or how to properly account for each deal. Tom asked you to meet with Jerry Loos at HydroQual and assist them with their financing decision. REQUIRED: 1. Prepare a schedule for the client showing which bid is better. Ignore potential tax effects because the company expects tax losses from operations that may preclude the deductibility of interest expense during the loan term. Discuss briefly in a well written paragraph why you chose one deal over the other, and incorporate all relevant authoritative sources in your explanation. Prepare a loan amortization schedule in good form for the deal you chose. 2. Decide if your answer would be different if the discount from Dealer 1 was just $18,000 instead of $20,000, keeping all other facts constant. Support your decision with a schedule and provide a well written paragraph discussing your decision in terms the client can understand. On Thursday, January 29, 20X2 Rick Bailey called Tom Fasbee with good news. The bank had committed to loan HydroQual an amount up to $275,000 (not to exceed the price paid to the dealer for two trucks) at 4.5 percent annual interest (the market rate for loans of three to four years). The loan was expected to be received on Monday, February 2 and would be repaid in four equal annual installments starting next year on February 1, 20X3. The borrowing also was to be secured by a lien on the equipment. Finally, Rick reported that a maintenance contract was in the works with a large refinery with work to begin early in March. He also hoped to win contracts from two water districts in the southern suburbs of St. Louis. The next day, Kay Mallard called Tom with a question. HydroQual had now received bids from two dealers for the planned purchase of crew trucks and equipment. Dealer 1 offered a list price of $140,000 and a discount of $20,000 per vehicle, but HydroQual would have to secure its own financing from the bank. Dealer 2 offered a list price of $129,000 and no discount, but did offer three-year financing at 1.3 percent annual interest through its manufacturer's finance affiliate. This loan required repayment in three equal annual installments. Kay stated that neither she nor Jerry Loos had been able to determine which is the better deal or how to properly account for each deal. Tom asked you to meet with Jerry Loos at HydroQual and assist them with their financing decision. REQUIRED: 1. Prepare a schedule for the client showing which bid is better. Ignore potential tax effects because the company expects tax losses from operations that may preclude the deductibility of interest expense during the loan term. Discuss briefly in a well written paragraph why you chose one deal over the other, and incorporate all relevant authoritative sources in your explanation. Prepare a loan amortization schedule in good form for the deal you chose. 2. Decide if your answer would be different if the discount from Dealer 1 was just $18,000 instead of $20,000, keeping all other facts constant. Support your decision with a schedule and provide a well written paragraph discussing your decision in terms the client can understand.

Answer rating: 100% (QA)

1 To determine which bid is better for HydroQual we need to compare the total cost of financing for ... View the full answer