A contract calls for annual payments of $2,400. Find the present value of the contract, assuming that (1) the number of payments is 7 and the current interest rate is 6 percent; (2) the number of payments is 14 and the current interest rate is 6 percent; (3) the number of payments is 7 and the current interest rate is 8 percent; and (4) the number of payments is 14 and the current interest rate is 8 percent. (Hint: Use Table 2 in Appendix C.)
Valuing an Asset for the purpose of Making a purchasing Decision
Sid Patel owns a service station and has the oppor- tunity to purchase a car-wash machine for $15,000. After carefully studying projected costs and revenues, Patel estimates that the car-wash machine will produce a net cash flow of $2,600 annually and will last for eight years. He determines that an interest rate of 14 percent is adequate for his business. Calculate the present value of the machine to Patel. (Hint: Use Table 2 in Appendix C.) Does the purchase appear to be a smart busi- ness decision? Why?
Text book: Principles of Accounting By Belverd Needles, Marian Powers, Susan Crosson.