Question

Refer to the situation described in BE 5–8. What amount did Canliss borrow assuming that the first $10,000 payment was due immediately? 

 

Data From BE 5-8

Canliss Mining Company borrowed money from a local bank. The note the company signed requires five annual installment payments of $10,000 beginning one year from today. The interest rate on the note is 7%. What amount did Canliss borrow?

Answer 1

Present value of an annuity due :

Particulars	Amount ($)	PV of $ 1 i = 7%	Present value ($)	n
First payment Second payment Third payment Fourth payment Fifth payment Total	10,000 10,000 10,000 10,000 10,000	1.000 0.934 0.873 0.816 0.763	10,000 9,340 8,730 8,160 7,630 43,860	1 2 3 4 5

Canliss Mining Company has to borrow $43,860

 

 

Using the present value of annuity due table:

Present value of annuity due (PV) = R(PVF-AD)

                                                       = $10,000(PVF-AD5.7%)

                                                       = $10,000 × 4.38721

                                                       = $43,872

Canliss Mining Company has to borrow $43,860