Crown Corporation agreed to sell some used equipment to one of its employees. Alternative financing arrangements for the sale have been discussed, and the present and future values of each alternative have been determined.

A. Crown offered to accept a $1,000 down payment and set up a note receivable that calls for four $1,000 payments at the end of each of the next four years. What is the net present value of this note if it is discounted at 6%?
B. The employee agrees to the down payment but would like the note for $4,000 to be payable in full at the end of the fourth year. Because of the increased risk associated with the terms of this note, Crown would apply an 8% discount rate. What is the true selling price of the equipment?
C. Suppose the employee borrows the $5,000 at 8% interest for four years from a bank so that he can pay Crown the full price of the equipment immediately. Also, suppose that Crown could invest the $5,000 for 3 years at 7%. What is the selling price of the equipment? What would be the future value of Crown’s investment?

  • CreatedJanuary 26, 2015
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