Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1,2019.Alden financed $37,908,000,and the note agreement will require $10 million in annual payments starting on December 31,2019 and continuing for a total of four more years (final payment December 31,2023).Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually.
- After the first payment was made,the note payable liability on December 31,2019 is closest to:
A)$32,908,000.
B)$31,698,800.
C)$40,000,000.
D)$27,908,000.

Question

Quizplus · Accepted Answer

The total amount financed is $37,908,000. 
The market interest rate is 10%, compounded annually. 
The annual payments are $10 million, starting on December 31, 2019 and continuing for four more years.

To calculate the note payable liability on December 31, 2019, we need to find the present value of the future payments.

Using the present value formula:

PV = PMT * ((1 - (1 + r)^-n )/ r)

Where: 
PMT = $10,000,000 
r = 10% 
n = 4

PV = $10,000,000 * ((1 - (1 + 0.10)^-4) / 0.10) 
PV = $10,000,000 * 3.16988 
PV = $31,698,800

Therefore, the note payable liability on December 31, 2019 is closest to $31,698,800, which is answer choice B.

Alden Trucking Company Is Replacing Part of Its Fleet of Trucks