Question

Blondie Corporation purchased a precision tool machine with computer controls that had a purchase price of $600,000. Blondie paid %40 of the purchase price in cash at the purchase date and agreed to pay %30 of the price 1 year later, and the remaining %30 of the price 2 years later, with no interest. Assuming that the prevailing interest rate for such a transaction is 6%, compounding annually, what is the capitalized cost of the machine?

Answer 1

The capitalized cost fo the machine is 570,010.68‬

Step-by-step explanation:

We will calculate the present value of the machine under these payment and calcualte the implicit interest.

We will use the formula for present value of a lump sum:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 180,000

time 1

rate 0.06

`(180000)/((1 + 0.06)^(1) ) = PV`

PV $169,811.3208

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 180,000

time 2

rate 0.06

`(180000)/((1 + 0.06)^(2) ) = PV`

PV $160,199.3592

240,000 + 169,811.32 + 160,199.36 = 570,010.68‬

And there are 600,000 - 570,011 = 29,989‬ interest