Question

ABC Corp. purchases some equipment from XYZ.  ABC agrees to pay $10,000 3-years from now.  ABC has existing loans at a 10% interest rate.  What is the purchase price of the equipment (or present value of the note)?

Answer 1

Solution

Information provided as follows,

Existing Interest Rate = 10%

Term = 3 Years

Amount to be paid after 3 years = $10000

In other words, we have been told the future value of the loan after 3 years, and now in order to find out the equipment price, we have to find out the present value.

As we know, Future Value = Present Value x (1 + Rate%)^Term

Here, the problem is as follows,

10000 = Present Value x (1 + 10%)³

Therefore, the present value will be,

10000 = Present Value x (1 + 10%)³
Or, 10000 = Present Value x (1 + 0.10)³
Or, 10000 = Present Value x (1.10)³
Or, 10000 = Present Value x 1.331
Or, Present Value = 10000 / 1.331
Or, Present Value = 7513.15 (Approx.)

Answer: Therefore, on the basis of information so provided, the purchase price should be $7513.15.