January 1 of this year, a Company completed the following transactions (assume a 9% annual interest rate):

Bought a delivery truck and agreed to pay $60,400 at the end of three years. Rented an office building and was given the option of paying $10,400 at the end of each of the next three years or paying $28,400 immediately. Established a savings account by depositing a single amount that will increase to $90,800 at the end of seven years. Decided to deposit a single sum in the bank that will provide 9 equal annual year-end payments of $40,400 to a retired employee (payments starting December 31 of this year).

What is the cost of the truck that should be recorded at the time of purchase?

Which option for the office building results in the lowest present value?

The cost of the truck that should be recorded at the time of purchase is $46,639

Paying installment is the best option

Explanation:

In order to Calculate the cost of the truck that should be recorded at the time of purchase we need find out present value of future amount of 60,400 with the following formula:

PV=FV / (1+i) ^n

FV = Future value

i = interest rate

n = No of years

By applying the formula = 60,400 / (1+.09) ^3

PV = $46,639

Therefore, $46,639 should be recorded as a cost of truck.

Paying installment is better option than paying lump sum amount of $28,400 as present value of installment method ($26,322 as per below table) is less than immediate payment amount.

PV of installment method

Year installment method PV Factor PV

1 10,400 0.917 9,537

2 10,400 0.842 8,757

3 10,400 0.772 8,029

Total 26,322