Question

Blondie Corporation purchased a precision tool machine with computer controls that had a purchase price of $600,000. Blondie paid %40 of the purchase price in cash at the purchase date and agreed to pay %30 of the price 1 year later, and the remaining %30 of the price 2 years later, with no interest. Assuming that the prevailing interest rate for such a transaction is 6%, compounding annually, what is the capitalized cost of the machine?

Answer 1

Answer:

The capitalized cost fo the machine is 570,010.68‬

Explanation:

We will calculate the present value of the machine under these payment and calcualte the implicit interest.

We will use the formula for present value of a lump sum:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity 180,000

time 1

rate 0.06

$\frac{180000}{(1 + 0.06)^{1} } = PV$  

PV  $169,811.3208  

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity 180,000

time 2

rate 0.06

$\frac{180000}{(1 + 0.06)^{2} } = PV$  

PV  $160,199.3592  

240,000 + 169,811.32 + 160,199.36 = 570,010.68‬

And there are 600,000 - 570,011 = 29,989‬ interest