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When a long-term note is given in the exchange for equipment, the amount considered as paid for the machine is the Present Value of the note payments discounted at the market rate.
Present Value means the current value of a future sum of money. It is also known as the the cash flow given in specified rate of return. Cash flows are discounted at discount rate and higher the discount rate. Present value states amount of money today is worth more than same amount in future. Calculation of Present value involves the assumption of the rate of return can be earned on the funds over the period. It is calculated by taking the expected cash flows of an investment and discounting them to the present day value.
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