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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 $2,458,000, or it can make annual payments of $336,800 for 15 years.

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Payments must begin now and be made on the first day of each of the 15 years, what payment method would you recommend assuming an expected effective-interest rate of 11% during the future period? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Present value of annual payment $

Recommended payment method

Annual PaymentsImmediate Payment
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Answer #1

Solution:

Present value of annual payment = $336,800 * Cumulative PV factor at 11% for 15 periods

= $336,800 * 7.19087 = $2,421,885

Recommended payment method = Annual payments

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