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The Jenkins Corporation has purchased an executive jet. The company has agreed to pay $200,000 per year for the next 10 years and an additional $1,000,000 at the end of the 10th year. The seller of the jet is charging 6% annual interest. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Determine the liability that would be recorded by Jenkins.'

Sagot :

Shahzaibfarazidn

Answer:

Present value of liability = $2,030,412.1871 rounded off to $2,030,412.19

Explanation:

To calculate the amount that would be recorded as a liability, we need to find the present value of the jet. The present value can be calculated by discounting the cash flows provided in the question. The 200000 cash flows that will be payable every year are in the form of an ordinary annuity and their present value will be calculated using the attached formula. The present value of 1000000 that is payable at the end of the 10th year will be calculated as follows,

Present Value of Cash flow = Cash Flow / (1+r)^t

Where,

  • r is the discount rate
  • t is the time period

Present value of liability =  200000 * [(1 - (1+0.06)^-10) / 0.06]  +  

1000000 / (1+0.06)^10

Present value of liability = $2,030,412.1871 rounded off to $2,030,412.19

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