Question
In: Accounting
The Jenkins Corporation has purchased an executive jet. The company has agreed to pay $201,600 per...
The Jenkins Corporation has purchased an executive jet. The company has agreed to pay $201,600 per year for the next 10 years and an additional $2,016,000 at the end of the 10th year. The seller of the jet is charging 7% annual interest. Determine the liability that would be recorded by Jenkins. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answer to nearest whole dollar.)
Solutions
Expert Solution
| Present value of liability | $ 24,40,786 | |||||
| Working; | ||||||
| Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | |||
| = | (1-(1+0.07)^-10)/0.07 | i | = | 7% | ||
| = | 7.023581541 | n | = | 10 | ||
| Present value of 1 | = | (1+i)^-n | ||||
| = | (1+0.07)^-10 | |||||
| = | 0.508349292 | |||||
| Present value of annual cash flow | = | Annual Cash flow | * | Present value of annuity of 1 | ||
| = | $ 2,01,600 | * | 7.02358154 | |||
| = | $ 14,15,954 | |||||
| Present value of Terminal value | = | Cash flow at the end of period | * | Present value of 1 | ||
| = | $ 20,16,000 | * | 0.50834929 | |||
| = | $ 10,24,832 | |||||
| Present value of liability | = | Sum of Present value of cash flows | ||||
| = | $ 14,15,954 | + | $ 10,24,832 | |||
| = | $ 24,40,786 | |||||
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