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PV of Agri-Products loan at delivery date

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McClelland Corporation agreed to purchase some landscaping equipment from Agri-Products for a cash price of $500,000. Before accepting delivery of the equipment, McClelland learned that the same equipment could be purchased from another dealer for $460,000. To avoid losing the sale, Agri-Products have offered McClelland a "no interest" payment plan-McClelland would pay $100,000 at delivery, $200,000 one year later, and the final $200,000 in two years.

Required

1. McClelland would usually pay annual interest of 9% on a loan of this type. What is the present value of the Agri-Products loan at the delivery date?

2. What journal entry would McClelland make if it accepts the deal and buys from Agri-Products?

3. What should McClelland do?

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Solution Summary

The solution displays the calculations to arrive at a present value, shows the journal entry and discusses a decision for McClelland.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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