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.