Russell Company has acquired a building with a loan that requires payments of $20,000 every six months for 5 years. The annual interest rate on the loan is 12%. What is the present value of the building? (^PV^of^$1, ^FV^of^$1, ^PVA^of^$1, and ^FVA^of^$1) (Use appropriate factor(s) from the tables provided.) A) $200,000 B) $147,202 C) $72,096 D) $86,590 E) $113,004

Question

Quizplus · Accepted Answer

To calculate the present value of the building, we need to find the sum of the present values of all the loan payments. The loan payments are an annuity due because they are made at the beginning of each six-month period.

First, calculate the semi-annual interest rate by dividing the annual interest rate by 2: 
Semi-annual interest rate = 12% / 2 = 6%

Next, use the annuity due present value factor table to find the present value factor for a 10-period annuity due at a 6% semi-annual interest rate. 
PV factor = 8.5136

Multiply the PV factor by the amount of each payment to find the present value of each payment: 
Present value of each payment = PV factor x payment amount
Present value of each payment = 8.5136 x $20,000 
Present value of each payment = $170,272

Finally, add up the present values of all the loan payments to find the present value of the building: 
Present value of building = $170,272 x 10 payments 
Present value of building = $1,702,720

Therefore, the best choice is B, $147,202.

Russell Company Has Acquired a Building with a Loan That