Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. On January 1, 2016, Alden will record a note payable in the amount of:
A)$37,908,000.
B)$40,000,000.
C)$41,698,000.
D)$50,000,000.

Question

Quizplus · Accepted Answer

To calculate the face value of the note payable on January 1, 2016, we need to use the present value formula:

PV = FV / (1 + r)n

where FV is the future value (or amount financed), r is the interest rate, and n is the number of periods.

In this case, we have:

FV = $37,908,000
r = 10%
n = 5 years (since payments start on December 31, 2016 and continue for 4 more years)

Using the formula, we get:

PV = $37,908,000 / (1 + 0.1)5
PV = $24,884,639.64

Therefore, the note payable on January 1, 2016 is $40,000,000 (rounded to the nearest dollar).

Alden Trucking Company Is Replacing Part of Its Fleet of Trucks