Question

Bonita Industries financed the purchase of a machine by making payments of $29000 at the end of each of five years. The appropriate rate of interest was 8%. The future value of one for five periods at 8% is 1.46933. The future value of an ordinary annuity for five periods at 8% is 5.86660. The present value of an ordinary annuity for five periods at 8% is 3.99271. What was the cost of the machine to Bonita?

Answer 1

Cost of Machine today = $115788.59

Step-by-step explanation:

To calculate the cost of machine to Bonita in today's term, we need to calculate the present value of annuity. We know that the payments made are in form of an ordinary annuity because the amount of payment is fixed (29000) , the payments are made after equal interval of time (at the end of each year) and are made in finite number (5 years).

We will multiply the annuity payment per period by the PV of ordinary annuity factor as provided in the question to calculate the value or price of machine today.

Cost of Machine today = 29000 * 3.99271

Cost of Machine today = $115788.59