Question

Newship Inc. has borrowed from its bank at a rate of 8 percent and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments?

Answer 1

To find the present value of the scheduled payments, we need to discount each payment back to its present value using the appropriate interest rate.

Step-by-step explanation:

To find the present value of the scheduled payments, we need to discount each payment back to its present value using the appropriate interest rate. The formula used to calculate present value is:

Present Value = Payment / (1 + Interest Rate)^n

Where Payment is the future payment amount, Interest Rate is the discount rate, and n is the number of periods from now until the payment is received.

Using this formula, we can calculate the present value of each payment and sum them up to find the total present value.

For example, for the first payment of $450,000 at the end of the year, the present value would be:

Present Value = $450,000 / (1 + 0.08)^1 = $450,000 / 1.08 = $416,666.67

Repeat this process for the remaining payments and add up the present values to find the total present value of the payments.