TZ acquired a machine and gave 10 instalment notes of $2,000 each. One note matures on the last day of each of the next 10 semi-annual periods. No interest was specified on the notes or the purchase contract. The going rate of interest for such transactions was 20 percent per annum. The cost of the new machine should be recorded by TZ as (rounded to the nearest dollar):

Question

Quizplus · Accepted Answer

To calculate the cost of the machine, we need to find the present value of the instalment payments using the given interest rate of 20% per annum.

Using the formula for present value of an annuity, we get:

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

Where PV is the present value, C is the instalment payment, r is the interest rate per period, and n is the number of periods.

Substituting the given values, we get:

PV = $2,000 x [1 - (1 + 0.20/2)^(-10 x 2)] / (0.20/2)
PV = $11,785.34

Therefore, the cost of the machine should be recorded as $12,290 (rounded to the nearest dollar). Option B is the correct answer.

TZ Acquired a Machine and Gave 10 Instalment Notes of $2,000