Coronado Industries financed the purchase of a machine by making payments of $23000 at the end of each of five years. The appropriate rate of interest was 11%. The future value of one for five periods at 11% is 1.68506. The future value of an ordinary annuity for five periods at 11% is 6.22780. The present value of an ordinary annuity for five periods at 11% is 3.69590. What was the cost of the machine to Coronado?

$85,005.70

Explanation:

To calculate the cost of the machine we must use the present value of an ordinary annuity. In this case, the interest charged was 11%, the payment was $23,000 a year and 5 yearly payments were made:

cost of the machine = payment x (present value ordinary 5 year annuity at 11%) = $23,000 x 3.69590 = $85,005.70

This is a simple way to determine the present value of a cash flow, much simpler than using an excel spreadsheet and the difference is insignificant, using the NPV function in excel you get $85,005.63.