A company bought a piece of equipment at the beginning of the year (January 1, 20X1)...

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Question

A company bought a piece of equipment at the beginning of the year (January 1, 20X1)...

A company bought a piece of equipment at the beginning of the year (January 1, 20X1) by signing the following note payable.

The note is due at maturity and interest is due annually.

Face value	260,000
Coupon rate	3.00%
Market rate	7.40%
Term	4

What is the fair value of the equipment at the time of purchase?

business accounting

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Answer 1

Answer #1

Based on the information available in the question, we can answer as follows:-

Table Values are based on
n=	4
i=	7.40%

Cash Flow	Amount	Table Value	Present Value
Interest payments	7,800	3.35683	26,183.27
Maturity Value	260,000	0.75159	195,414.25
Fair Value of the Note		221,597.52

Interest Payments = $260,000 * 3% = $7,800 per period

Maturity value = $260,000

For Interest payments, we use the PVIFA (7.60 %, 4 years) to find the table value and for Maturity value we calculate the Present value (7.60%, 4 years) to arrive at the Fair value of the note.

Based on the above calculation, the correct answer is $221,598.

Please let me know if you have any questions via comments and all the best :) !

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Answer 2

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