bankruptcy protection. While the Atkins diet was initially popular because of its ap-
pealing approach and relatively fast results, criticism by health experts about the safety
of the diet led to a sharp drop in revenues and cash flow. As cash flows diminished,
the company was unable to meet $300 million in principal and interest payments. As
a result, creditors forced the company into Chapter 11 bankruptcy and, thus, became
the new owners.^4
In a related example, Krispy Kreme Doughnuts, the popular doughnut franchise,
defaulted on its debts recently as a result of a downturn in revenues that were insuf-
ficient to support interest and debt payments. The company cited the popularity of the
Atkins diet as a key factor that contributed to the downturn in its revenues.
When a corporation issues bonds, the price that buyers are willing to pay for the
bonds depends upon present value concepts. For this reason, we discuss present value
concepts next.Present Value Concepts
Because of the ability to earn interest, money received in the future is not worth as
much as it is today. That is, money has time value. For example, if Apex Corp. de-
posited $55,840 in the bank today at 6% annual interest, it would accumulate to
$100,000 in 10 periods. In contrast, if Apex did not receive the $55,840 until the end of
the 10 periods, the $44,160 ($100,000 $55,840) of interest would not have been earned.
In other words, $55,840 received or paid in the future is not the same as $55,840 re-
ceived today. Thus, comparing $55,840 to be received today to $55,840 to be received
in 10 years is like comparing apples to oranges, as shown in Exhibit 4.448 Chapter 10 Liabilities
TodayPresent
ValueFuture
Amount$55,840 $55,840Exhibit 4 10 periods forward
Present Values and
Future Amounts: Apples
and OrangesHow then do we compare current and future dollars? We do this by using present
value.Present valueis the current value today of dollars to be received or paid in the
future. That is, present value computes today’s value of amounts to be received in the
future by considering the effects of interest.Present Value of an Amount to Be Received in the Future. The present value of
a future amount is determined by (1) the interest rate and (2) the number of periods
until the future amount is received or paid. To calculate present value, the future
amount is multiplied by the present value of $1 factor for the interest rate and time
period.Present value of $1factors are found in the present value tables included in
Appendix A at the end of this text. An excerpt from these tables is illustrated in
Exhibit 5.
In Exhibit 5, the columns represent interest rates, and the rows represent the num-
ber of periods. For example, the present value of $1, 10 periods hence at an interest
rate of 6%, which we will denote as Present Value of $16%,n=10, is 0.55840. Thus, the
present value of $100,000 to be received 10 years in the future can be calculated by4 Elizabeth Lesure, “Atkins Company, Leader in Low-Carb Diet Craze, Files for Bankruptcy,” Associated
Press, August 1, 2005.