A company must repay the bank a single payment of $38,000 cash in 5 years for a loan it entered into. The loan is at 6% interest compounded annually. The present value factor for 5 years at 6% is .7473. The present value of an annuity factor for 5 years at 6% is 4.2124. The present value of the loan (rounded) is

$28,397

Explanation:

GIVEN the following ;

Single cash payment = $38,000

Period (n) = 5 years

Rate = 6%

Present Value factor for 5 years at 6%= 0.7473

Present value of annuity factor for 5 years at 6% = 4.2124

Calculate the present value of the loan:

Since the repayment requires only a single payment, This means how much $38,000 is worth today. Therefore, the present value factor of 0.7473 will be used to multiply the the lump sum of $38,000

$38,000 × 0.7473 = $28,397.4

Therefore present value of the loan is $28,397.

The present value of annuity factor is required only when a fixed payment is to be made at specified intervals for a certain period.

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