Krentz Insulating accepted a 3-year note for $1,500 in lieu of immediate payment for insulating equipment sold to a local firm. Find the present value of the note at 4% per year compounded semiannually.

$1,331.96

Explanation:

Present value (PV) refers to today's worth of cash flows to be received at a future date. The formula for PV is given as follows:

PV = F ÷ (1 + r)^n (1)

PV = present value = ?

F = Future amount or note amount = $1,500

r = interest rate = 4% annually = 0.04 annually

                         = (0.04 ÷ 2) semiannually = 0.02 semiannually

n = number of compounding period = 3 years

  = (3 × 2) semiannually = 6 semiannually

Substituting the figures above into equation (1). we have:

PV = $1,500 ÷ (1 + 0.02)^6

     = $1,500 ÷ (1.02)^6

     = $1,500 ÷ 1.126162419264

     = $1,331.96  

Therefore, the present value of the note at 4% per year compounded semiannually is $1,331.96.

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