Calculate the Present Cost of Office Furniture Purchase
What is the present cost of the office furniture arrangement considering the discount rate of 10%?
A R 24 042
B 16 042
C R 32 042
D 40 000
Answer:
The present cost of the office furniture arrangement, considering the discount rate of 10%, would be approximately R 24,042.
Watson Ltd is purchasing office furniture worth R 40,000 for its consulting business. The organization has been given the option to pay a deposit of R 8,000 now and the remainder in 3 years with no interest applicable. To calculate the present cost of the arrangement with a discount rate of 10%, we need to determine the present value of the remaining payment to be made in 3 years.
Here's how you can calculate it step by step:
1. Identify the relevant information:
- Initial cost of the office furniture: R 40,000
- Deposit paid: R 8,000
- Remaining payment to be made in 3 years: R 40,000 - R 8,000 = R 32,000
- Discount rate: 10%
2. Calculate the present value of the remaining payment:
To calculate the present value, we need to discount the future payment using the discount rate. The formula to calculate the present value is:
Present Value = Future Value / (1 + Discount Rate)^Number of Periods
In this case, the future value is R 32,000, the discount rate is 10%, and the number of periods is 3 years. Plugging in these values into the formula:
Present Value = R 32,000 / (1 + 0.10)^3
Evaluating the expression inside the parentheses:
Present Value = R 32,000 / (1.10)^3
Calculating the value inside the parentheses:
Present Value = R 32,000 / 1.331
Calculating the present value:
Present Value ≈ R 24,042 (rounded to the nearest rand)
Therefore, the present cost of the arrangement, considering the discount rate of 10%, would be approximately R 24,042. So, the correct answer is A) R 24,042.