E6-11B (Evaluation of Purchase Options) Loh Excavating Inc. is purchasing a bulldozer.

E6-11B (Evaluation of Purchase Options) Loh Excavating Inc. is purchasing a bulldozer. The equipment has a price of $300,000. The manufacturer has offered a payment plan that would allow Loh to make 10 equal annual payments of $48,823.59, with the first payment due one year after the purchase.

Instructions

(a) How much total interest will Loh pay on this payment plan?

(b) Loh could borrow $300,000 from its bank to finance the purchase at an annual rate of 9%. Should Loh borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?