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In this problem, you will apply the concept of present value to find at what amount...

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Accounting

In this problem, you will apply the concept of present valueto find at what amount a bond payable should be recorded. Iencourage you to use Excel to find the answer.

Company ABC needs $1,000,000 for an investment but does not haveenough cash to finance the opportunity. After considering itsoptions, ABC decides to finance the investment using debt.Unfortunately, ABC is unable to find a single creditor willing tolend it the entire $1,000,000. Instead, it finds four creditorseach willing to lend it $250,000. All four lenders agree that theyought to earn 8% annual interest on their investment. However, eachlender wants its $250,000 returned at a different point in time.One lender demands repayment after five years, the next ten years,the third fifteen years, and the final twenty years. ABC agrees tomake annual payments totaling $12,000 to each lender while theprincipal balance of $250,000 is outstanding (for example, throughyears one through five for the first lender).

What is the value of the liability that Company ABC must recordfor the above financing plan? Round your answer to the nearestdollar.

Answer & Explanation Solved by verified expert
4.3 Ratings (952 Votes)
Total Liability to be booked PV of Principal Amount repayment PV of Interest repayments 418392 581608 1000000 Workings as below Principal Repayment Repayment after years Discounting factor 8 PV 250000 5 years 0680583197 170146 250000 10 years 0463193488 115798    See Answer
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