Question

Crane Company receives a $74,000, 5-year note bearing interest of 5% (paid annually) from a customer at a time when the discount rate is 6%.

Required:
What is the present value of the note received by Crane?

Answer 1

Answer: $70,882.98

Step-by-step explanation:

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

Present value of interest payment:

First calculate the interest:

= 5% * 74,000

= $3,700

This amount is constant so is an annuity

Present value = 3,700 * Present value interest factor of annuity, 5 years, 6%

= 3,700 * 4.2124

= $15,585.88

Present value of face value :

= 74,000 / (1 + 6%)⁵

= $55,297.10

Present value of note:

= 15,585.88 + 55,297.10

= $70,882.98