A company borrows $10,000 and issues a 5-year,6% installment note with interest payable annually.The factor for the present value of an annuity at 6% for 5 years is 4.2124.The factor for the present value of a single sum at 6% for 5 years is 0.7473.The present value of the interest payments is $2,527.44.

Question

Quizplus · Accepted Answer

To calculate the present value of the interest payments, we use the formula:

Present value of annuity = installment amount x present value factor of annuity

The installment amount is calculated as follows:

Installment amount = Total loan amount / present value factor of annuity

Installment amount = $10,000 / 4.2124 = $2,374.75

The total interest payments over 5 years will be:

Total interest = Installment amount x number of payments - Principal amount

Total interest = $2,374.75 x 5 - $10,000

Total interest = $2,873.75

Therefore, the present value of the interest payments is:

Present value of interest payments = Total interest x present value factor of single sum

Present value of interest payments = $2,873.75 x 0.7473 = $2,147.17

This is not equal to the given value of $2,527.44. Hence, the answer is False.

A Company Borrows $10,000 and Issues a 5-Year,6% Installment Note