Question

The Nebiyat Company is facing several decisions regarding investing and present and Future financing activities. Address each decision independently. Value 1. On May 31, 2000, Nebiyat purchased equipment and agreed to pay the vendor $50,000 on the purchase date and the balance in four annual installments of $20,000 on each May 31 beginning May 31, 2001. Assuming that an interest rate of 8% properly reflects the time value of money in this situation, at what amount should Nebiyat value the equipment?​

Answer 1

To find the value of equipment that Nebiyat Company purchased, one must calculate the present discounted value (PDV) of the future payments at an 8% interest rate. The total PDV, adding the initial payment and the present values of the four installments, comes to $116,244.89. This is the value at which Nebiyat should record the equipment.

Step-by-step explanation:

The student is presented with a business scenario where Nebiyat Company purchased equipment with a combination of an upfront payment and future installments at an interest rate of 8%. To determine the value of the equipment, we will calculate the present discounted value (PDV) of the future payments.

Given the details, Nebiyat paid $50,000 upfront and will make four annual installments of $20,000 starting May 31, 2001. Using the formula PDV = Future Value / (1 + Interest Rate)Number of Years, we can calculate each installment's present value and sum them to find the total PDV for the equipment:

• Installment 1: $20,000 / (1 + 0.08)1 = $18,518.52
• Installment 2: $20,000 / (1 + 0.08)2 = $17,147.14
• Installment 3: $20,000 / (1 + 0.08)3 = $15,877.16
• Installment 4: $20,000 / (1 + 0.08)4 = $14,701.07

Adding the present values of the installments plus the initial payment:

PDV = $50,000 + $18,518.52 + $17,147.14 + $15,877.16 + $14,701.07 = $116,244.89

Therefore, Nebiyat should value the equipment at $116,244.89.