Question

On September 1, Year 1, an entity purchased a new machine that it does not have to pay for until September 1, Year 3. The total payment on September 1, Year 3, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine will be the total payment multiplied by what time value of money factor?

Answer 1

Answer:

The value of money factor (future value of a lump sum for three year at 10% interest rate) is 1.331

we will return the principal and 33.1% of the principal as interest

Explanation:

we have to calcualte the FV of a principal of $1 after 3 year exposed to 10% interest rate:

$1(1+r)^n=FV\\(1+0.1)^3=FV\\factor = 1.331$