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Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of...

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $ 1,979,000, or it can make annual payments of $ 270,300 for 15 years, each payment due on the last day of the year. Which method of payment do you recommend, assuming an expected effective interest rate of 11% during the future period?

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Answer #1

Calculation of present value of annual payments to be made over a period of 15 Years:

a. Annual payments ,A = $ 270300

b. Rate of interest , r = 11%

c. Number of years , n = 15 years

d. PVAF = Present Value Annuity factor

Present value, PV = Annuity (A) x PVAF (r,n)

= $ 270300 x PVAF (11%, 15 years)

= $ 270300 x 7.19

= $ 1943457

Conclusion: From the above it is observed that making annual payment of $ 270300 every year over a period of 15 years is better for Sonic Foundry Corporation rather than making an immediate payment of $1979000. It results in savings in interest cost.

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