M&B Tooling Ltd. is assessing two available options for the purchase of new equipment with a negotiated cash price of $100,000. The manufacturer is willing to accept a down payment of 20% of the purchase price and an instalment note for the balance. The note would require quarterly fixed principal payments (plus interest) starting October 1, 2020, for a period of two years. M&B has a proposal from its bank for an instalment loan for two years that requires a fixed blended monthly payment (including both principal and interest) starting August 1, 2020. The loan would be for 80% of the equipment’s purchase price. The current market rate of interest is 8%. Both contracts have an interest rate of 8%.

Instructions

a. Is there any measurement uncertainty in determining which option is best for M&B? Which discounted cash flow approach should be used in the comparison of the two alternatives?

b. Calculate the amount of the payments required of M&B under each alternative. Use either a financial calculator or Excel functions in your calculation.

c. Besides interest costs, what other considerations should M&B use in making a choice between the two alternatives?

d. Digging Deeper What financial ratios could be affected by M&B’s choice?