On January 1, Boston Company completed the following transactions (use a 7% annu
ID: 2563155 • Letter: O
Question
On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Borrowed $118,800 for nine years. Will pay $7,900 interest at the end of each year and repay the $118,800 at the end of the 9th year. Established a plant remodeling fund of $492,850 to be available at the end of Year 10. A single sum that will grow to $492,850 will be deposited on January 1 of this year. Agreed to pay a severance package to a discharged employee. The company will pay $76,900 at the end of the first year, $114,400 at the end of the second year, and $151,900 at the end of the third year. Purchased a $179,500 machine on January 1 of this year for $35,900 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year. 4.value: 5.00 pointsRequired information Required: 1. In transaction (a), determine the present value of the debt. (Round your answer to nearest whole dollar.)
Explanation / Answer
Solution:
Given that Amount Borrowed = $118,800, Annual interest = 7%, Number of years = 9 and Annual interest = $7,900
Present value of interest payments = $7,900 (PVIFA @ I, n)
Present value of interest payments = $7,900 (PVIFA @ 7%, 9)
Present value of interest payments = $7,900 [(1.07^9-1)/(0.07*1.07^9)]
Present value of interest payments = $7,900 (6.51523)
Present value of interest payments = $51,470.33
Present value of amount paid at maturity = $118,800 (PVIF @ 7%, 9)
Present value of amount paid at maturity = $118,800 [1/1.07^9]
Present value of amount paid at maturity = $118,800 (0.54393)
Present value of amount paid at maturity = $64,619.33
Present value of debt = $51,470.33 + $64,619.33
Present value of debt = $116,089.7