Question

Pharoah Inc. loans money to John Kruk Corporation in the amount of $976,000. Pharoah accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Pharoah needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Pharoah will receive on the sale of the note

Answer 1

Answer: $‭900,635

Step-by-step explanation:

Amount Pharaoh will receive is:

= Present value of the interest payments + Present value of the note

2 years have gone by which leaves 5 years.

Period = 5 * 2 = 10 semi annual periods

Periodic interest = 8% / 2 = 4%

Periodic discount = 10% / 2 = 5% per period

Interest payment = 976,000 * 4%

= $‭39,040‬

Amount to be received:

= (‭39,040‬ * Present value interest factor of annuity, 5%, 10 periods) + 976,000/(1 + 5%)¹⁰

= ‭(‭39,040‬ * 7.7217) + 599,179.34

= $‭900,635