Question

2. The Jenkins Corporation has purchased an executive jet. The company has agreed to pay $201,200 per year for the next 10 years and an additional $2,012,000 at the end of the 10th year. The seller of the jet is charging 6% 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.)

Present Value

Answer 1

IN this question there are two cash flows.

One is an annuity of 201200, another one is a lump sum payment of $2012000

We need to find the PV of both payments.

PV of annuity

Present value of annuity is the present worth of cash flows that is to be received in the future, if future value is known, rate of interest in r and time is n then PV of annuity is

PV of annuity = P[1- (1+ r)^-n]/ r

Where,

              Periodic deposit (P) = $201200

              Interest rate = 6%

              Time (n) = 10

Let’s put all the values in the formula to find PV o annuity

= 201200[1- (1+ 0.06)^-10]/ 0.06

= 201200[1- (1.06)^-10]/ 0.06

= 201200[1- 0.558394776915118]/ 0.06

= 201200[0.441605223084882/ 0.06]

= 201200[7.3600870514147]

= 1480849.51

PV of Lump Sum

Present value is the present worth of cash that is to be received in the future, if future value is known, rate of interest in r and time is n then PV is

PV = FV/ (1 + r) ^n

Where,

FV = 2012000

r = 0.06

n = 10

Let's put all the values in the formula

= 2012000/ (1 + 0.06)^10

= 2012000/ (1.06)^10

= 2012000/ 1.7908

= 1123520.21

So Total liability that will be recorded in the books is = 1480849.51 + 1123520.21 = $2604369.72

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