On January 2, 2017, Gabon Corp.purchases a new machine.The company makes a $2,000 cash down payment, and agrees to pay four annual instalments of $4,000 each, starting December 31, 2017, signing a non-interest bearing note to this effect.The cash equivalent price of the machine is not known, but the appropriate interest rate for this type of transaction is 9% p.a.Rounding to the nearest dollar (if necessary), Gabon should record the cost of the machine at

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the four annual payments of $4,000 each, using the appropriate interest rate of 9%. We can use the present value of an annuity formula:

PV = PMT x [1 - (1 / (1 + r)n)] / r

Where PV is the present value, PMT is the payment, r is the interest rate, and n is the number of periods.

In this case, PMT = $4,000, r = 9%, and n = 4. Plugging in the numbers, we get:

PV = $4,000 x [1 - (1 / (1 + 0.09)4)] / 0.09 = $12,959

So the present value of the four annual payments is $12,959.

Next, we need to add the $2,000 cash down payment to get the total cost of the machine:

Total cost = $12,959 + $2,000 = $14,959

Therefore, Gabon should record the cost of the machine at $14,959, which is answer choice C.