Question

A company must repay the bank a single payment of $38,000 cash in 5 years for a loan it entered into. The loan is at 6% interest compounded annually. The present value factor for 5 years at 6% is .7473. The present value of an annuity factor for 5 years at 6% is 4.2124. The present value of the loan (rounded) is

Answer 1

Answer: $28,397

Step-by-step explanation:

GIVEN the following ;

Single cash payment = $38,000

Period (n) = 5 years

Rate = 6%

Present Value factor for 5 years at 6%= 0.7473

Present value of annuity factor for 5 years at 6% = 4.2124

Calculate the present value of the loan:

Since the repayment requires only a single payment, This means how much $38,000 is worth today. Therefore, the present value factor of 0.7473 will be used to multiply the the lump sum of $38,000

$38,000 × 0.7473 = $28,397.4

Therefore present value of the loan is $28,397.

The present value of annuity factor is required only when a fixed payment is to be made at specified intervals for a certain period.

Answer 2

The present value of the loan = $38,000 * 0.7473 = $28,397.4

Step-by-step explanation:

the annuity factor will not be used for the loan since the loan is not being withdrawn annually and the repayment is not also on annually basis. To get the present value of the loan, the loan will be discounted.