A company purchases a piece of property with a fair market value of $100,000, paying for it by signing a note payable requiring cash payments of $20,000 at the beginning of each year for six years. What is the interest rate implicit in the note?
A)6%.
B)7%
C)8%
D)9%.

Question

Quizplus · Accepted Answer

The interest rate implicit in the note can be found by calculating the internal rate of return (IRR) for the cash flows. The present value of the annuity of $20,000 for six years should equal the fair market value of $100,000. Using financial formulas or a financial calculator, the IRR that equates these cash flows is approximately 8%.

A Company Purchases a Piece of Property with a Fair