Question

In: Accounting

A company must repay the bank a single payment of $30,000 cash in 3 years for...

A company must repay the bank a single payment of $30,000 cash in 3 years for a loan it entered into. The loan is at 10% interest compounded annually. The present value factor for 3 years at 10% is 0.7513. The present value of the loan (rounded) is:

Multiple Choice

-$27,000.

-$22,539.

-$39,000.

-$30,000.

-$21,000.

Expert Solution

Let the present value is $100

1^st year interest = $100 × 0.10 = $10

Amount begging of 2^nd year = Present value + Interest = $100 + $10 = $110

2^nd year interest = $110 × 0.10 = $11

Amount beginning of 3^rd year = Amount begging of 2^nd year + 2^nd year interest

= $110 + $11

= $121

3^rd year interest = $121 × 0.10 = $12.1

Amount ending of 3^rd year = Amount beginning of 3^rd year + 3^rd year interest

= $121 + $12.10

= $133.10

This is equal to $30,000 (repayment amount).

Present value = Repayment amount × ($100 / $133.10)

= $30,000 × 0.7513

= $22,539

Answer: 2^nd option

ekkarill92 answered 1 year ago

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