Question

Spielberg Inc. signed a $300,000 noninterest-bearing note due in two years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?

Answer 1

Answer:

The value of debt at its inception amounts to $243,600

Explanation:

The value of the debt at the inception is computed by computing the PV (stands for Present Value), which is as follows:

Present Value (PV) = Amount of note × PV value

where

Amount of note is $300,000

PV value is computed as:

n is number of years which is 2

i or r is interest rate which is 11%

So,

PV = 1 / (1 +r or i ) ^ n

PV = 1 / (1 + 11%) ^ 2

PV = 1 / (1.11) ^ 2

PV = 0.8116 or 0.812

Note: This value can also be taken from the Present Value Table.

Putting the values above:

PV = $300,000 × 0.812

= $243,600