Answer:
Johnstone should value the equipment at <u>$40,326.29</u>.
Explanation:
To determine this, the present value of the five annual installments of $8,000 is first calculated using the formula for calculating the present value of an ordinary annuity as follows:
PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PV = Present value of the five annual installments =?
P = Annual payment = $8,000
r = interest rate = 10%, or 0.10
n = number of years = 5
Substitute the values into equation (1) to have:
PV = $8,000 * ((1 - (1 / (1 + 0.10))^5) / 0.10)
PV = $8,000 * 3.79078676940845
PV = $30,326.29
Therefore, the present value of the five annual installments of $8,000 is approximately $30,326.29.
As result of this:
Value the equipment = Payment on the purchase day + present value of the five annual installments = $10,000 + $30,326.29 = $40,326.29
Therefore, Johnstone should value the equipment at <u>$40,326.29</u>.
