On Thursday, January 15, Nick called Tom with good news. The bank had committed to loan Hydromaint an amount up to $355,000 (not to exceed the price paid to the dealer for three trucks) at 6.50 percent annual interest (the market rate for loans of three to four years). The loan was expected to be received on February 1 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, Nick reported that a maintenance contract was in the works with a large refinery with work to begin on March 1. He also hoped to win contracts from two water districts in the southern suburbs of St. Louis.
On the following Tuesday, Ray Ballard called Tom with a question. Hydromaint had received bids from two dealers for the planned purchase of crew trucks and equipment. Dealer 1 offered a list price of $130,000 and a discount of $26,000 per vehicle, but Hydromaint would have to secure its own financing from the bank. Dealer 2 offered a list price of $115,000 and no discount, but did offer three-year financing at 2.0 percent annual interest through its manufacturer's finance affiliate. This loan required repayment in three equal annual installments. Ray stated that neither he nor Jerry Loos had been able to determine which was the better deal or how to properly account for each deal. Tom asked you to meet with Jerry Loos at Hydromaint and assist them with their financing decision.
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.
2. Decide if your answer would be different if the discount from Dealer 1 was just $24,000 instead of $26,000, 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.