1

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

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?

Answers

Solution:

Fair value of equipment = Present value of interest and principal discounted at market rate of interest

= ($260,000*3%) * Cumulative PV factor at 7.40% for 4 periods + $260,000 * PV factor at 7.40% for 4th period

= $7,800 * 3.35685 + $260,000*0.75159

= $221,597


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