Question

1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $21,000 on the purchase date and the balance in six annual installments of $9,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 12% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?

Answer 1

Answer:

$58,002.60

Explanation:

First, it is clear to include the $21,000 as part of the value of the equipment.

Now, the $9,000 annual payment after every year for six years need to be presented in its present value, meaning what is the value of those future amounts of $9,000 on June 30, 2018.

To calculate the present value of annuity (annuity means constant and equal payments) for those 6 payments of $9,000, we would need the Present Value Factor which is supplied from the Present Value Table.

Looking at 12% for 6 periods ("six annual installments") on the table, it gives the PV factor of 4.1114.

Just multiply $9,000 by 4.1114 and we get 37,002.60

Finally add the downpayment of $21,000 with the present value $37,002.60 and we would get the total value of the equipment of 58,002.60