Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The machine reported on the balance sheet as of the purchase date is closest to:
A)$123,255.
B)$130,000.
C)$80,000.
D)$73,255.

Question

Quizplus · Accepted Answer

The machine's cost includes the initial $50,000 plus the present value of the $10,000 payments. The present value of an annuity formula is used to calculate the present value of the $10,000 payments, discounted at 8% annually (or 2% quarterly) over 8 periods (2 years). Adding this to the initial payment gives a total cost of approximately $123,255.

Rusty Corporation Purchased a Rust-Inhibiting Machine by Paying $50,000 Cash