To illustrate how to measure a liability using a present
value table, assume that a company plans to borrow cash and repay it as
follows: $2,000 after one year, $3,000 after two years, and $5,000 after
three years. How much does this company receive today if the interest
rate on this loan is 10%?
To answer, we need to compute the present
value of the three future payments, discounted at 10%. This computation
is shown in Exhibit 14A.4 using present values from Exhibit 14A.3.
The company can borrow $8,054 today at 10% interest in exchange for its
promise to make these three payments at the scheduled dates.
| EXHIBIT 14A.4 | Present Value of a Series of Unequal Payments |
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