Question

1. The company issues a note to a customer to borrow cash for six years, and will pay $600,000 to the customer at the end of the six-year period but not pay any interest. If the annual market interest rate is 5%, a. please calculate the present value of the note (compounded annually and rounded to the nearest dollar).

b. Based on Part 1, if the company will pay $600,000 at the end of the six-year period, and interest $24,000 at the end of each of the six years, please calculate the present value of the note (rounded to the nearest dollar).

c. Based on Part 1, if the company will pay $600,000 at the end of the six-year period, and interest $24,000 at the end of each of the last five years (the second to sixth year), please calculate the present value of the note (rounded to the nearest dollar).

Answer 1

ANSWER
a)
The Company issues a note to a customer to borrow cash for six years,
and pay will pay $ 600,000 at the end of the six year period but no t
Interest
The Annual market interest rate is 5%
CALCULATION
YEAR	AMOUNT	RATE %	PRESENT VALUE FACTOR	PRESENT VALUE
YEAR 1	$               -	5	0.95
YEAR 2	$               -	5	0.91
YEAR 3	$               -	5	0.86
YEAR 4	$               -	5	0.82
YEAR 5	$               -	5	0.78
YEAR 6	$ 6,00,000	5	0.75	$        4,47,729
	$ 6,00,000			$        4,47,729
The present value of the Note = $447,729
b)
If the company will pay $ 600,000 at the end of the six year period and
Interest $24,000 at the end of each of the six years
The Annual market interest rate is 5%
CALCULATION
YEAR	AMOUNT	RATE %	PRESENT VALUE FACTOR	PRESENT VALUE
YEAR 1	$     24,000	5	0.95	$            22,857
YEAR 2	$     24,000	5	0.91	$            21,769
YEAR 3	$     24,000	5	0.86	$            20,732
YEAR 4	$     24,000	5	0.82	$            19,745
YEAR 5	$     24,000	5	0.78	$            18,805
YEAR 6	$ 6,24,000	5	0.75	$        4,65,638
	$ 7,44,000			$        5,69,546
The present value of the Note = $569,546
c)
If the company will pay $ 600,000 at the end of the six year period and
Interest $24,000 at the end of each of the last five years (Second to
Sixth year)
The Annual market interest rate is 5%
CALCULATION
YEAR	AMOUNT	RATE %	PRESENT VALUE FACTOR	PRESENT VALUE
YEAR 1	$               -	5	0.95	$                     -
YEAR 2	$     24,000	5	0.91	$            21,769
YEAR 3	$     24,000	5	0.86	$            20,732
YEAR 4	$     24,000	5	0.82	$            19,745
YEAR 5	$     24,000	5	0.78	$            18,805
YEAR 6	$ 6,24,000	5	0.75	$        4,65,638
	$ 7,20,000			$        5,46,689
The present value of the Note = $546,689