Question

Daltrey Corporation purchased some machinery and agreed to pay the seller $5,000 at the end of this and the next four years. Assuming 8% compounded annually, (1) What is the acquisition cost of the machinery (what is its present value?), and (2) How much interest expense will Daltrey Corporation incur over the five years?

-The acquisition cost of the machinery is ?

- The amount of interest expense over the five years is? (use an appropriate alebraic formula to calculate your result). Please show work on excel and how you calculated the formulas

Answer 1

Calculation of machinery value
Year	Cash payments	PV Factor	Present value of cash payments
1	$ 5,000.00	0.92593	$    4,629.63
2	$ 5,000.00	0.85734	$    4,286.69
3	$ 5,000.00	0.79383	$    3,969.16
4	$ 5,000.00	0.73503	$    3,675.15
5	$ 5,000.00	0.68058	$    3,402.92
Present value of total payments / Value of machinery			$ 19,963.55

Schedule of Payment
Year	Cash payments	Beginning balance	Interest payments	Principle payment	Ending balance
1	$    5,000.00	$       19,963.55	$        1,597.08	$    3,402.92	$ 16,560.63
2	$    5,000.00	$       16,560.63	$        1,324.85	$    3,675.15	$ 12,885.48
3	$    5,000.00	$       12,885.48	$        1,030.84	$    3,969.16	$    8,916.32
4	$    5,000.00	$         8,916.32	$            713.31	$    4,286.69	$    4,629.63
5	$    5,000.00	$         4,629.63	$            370.37	$    4,629.63	$                 -
Total	$ 25,000.00		$        5,036.45	$ 19,963.55

Requirement 1

The acquisition cost of the machinery is $19,963.55

Requirement 2

The amount of interest expense over the five years is $5,036.45