Question

18. Charlie Corp. is purchasing new equipment with a cash cost of $250,000 for the assembly line. The manufacturer has offered to accept $57,400 payments at the end of each of the next six years. What is the interest rate that Charlie Corp. will be paying? a. 8% b. 9% C. 10% d. 11%.

Answer 1

Ans : Option C, 10%

Future value = Present value * Present value annuity factor (X%,6 year)

250000 = 57400 * Present value annuity factor (X%,6 year)

Present value annuity factor (X%,6 year) = $ 250,000 / $ 57,400

= 4.355401.

From the below table, at 10,% , present value annuity factor matches, it is 10% interest rate.

Years	1/(1+r)^n	Present value factor	1/(1+r)^n	Present value factor	1/(1+r)^n	Present value factor	1/(1+r)^n	Present value factor
1	1/(1+10%)	0.909090909	1/(1+8%)	0.925925926	1/(1+9%)	0.917431193	1/(1+11%)	0.900900901
2	1/(1+10%)^2	0.826446281	1/(1+8%)^2	0.85733882	1/(1+9%)^2	0.841679993	1/(1+11%)^2	0.811622433
3	1/(1+10%)^3	0.751314801	1/(1+8%)^3	0.793832241	1/(1+9%)^3	0.77218348	1/(1+11%)^3	0.731191381
4	1/(1+10%)^4	0.683013455	1/(1+8%)^4	0.735029853	1/(1+9%)^4	0.708425211	1/(1+11%)^4	0.658730974
5	1/(1+10%)^5	0.620921323	1/(1+8%)^5	0.680583197	1/(1+9%)^5	0.649931386	1/(1+11%)^5	0.593451328
6	1/(1+10%)^6	0.56447393	1/(1+8%)^6	0.630169627	1/(1+9%)^6	0.596267327	1/(1+11%)^6	0.534640836
		4.355260699		4.622879664		4.48591859		4.230537854