Jordon Company is considering replacing its automated stamping machine. The machine is specialized and very expensive. Jordon is considering three acquisition alternatives. The first is to lease a machine for 10 years at $1 million per year, after which time Jordon can buy the machine for $1 million. The second alternative is to pay cash for the machine at a cost of $7 million. The third alternative is to make a down payment of $3 million, followed by 10 annual payments of $550,000. The company is trying to decide which alternative to select.
Required:
1. Assuming the present value of the lease payments is $7.2 million and the present value of the 10 loan payments of $550,000 is $4.1 million, determine which alternative Jordon should choose.
2. Interpretive Question: Your decision in part (1) was based only on financial factors. What other qualitative issues might influence your decision?