Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years.The first payment is due three months after the purchase date.Husky's incremental borrowing rate is 12%.Each of the payments is closest to: (FV of $1,PV of $1,FVA of $1,and PVA of $1)(Use the appropriate factor(s)from the tables provided. )
A)$28,000.
B)$66,940.
C)$37,981.
D)$33,608.

Question

Quizplus · Accepted Answer

To find the payment amount, we use the Present Value of an Annuity (PVA) formula since the payments are equal and occur at regular intervals. The formula is PVA = P * [1 - (1 + r)^-n] / r, where P is the payment, r is the periodic interest rate, and n is the total number of payments. Given a 12% annual interest rate, the quarterly rate is 3% (12% / 4). The total number of payments over five years, with quarterly payments, is 20 (5 years * 4 quarters). The present value (PV) is the cost of the building, $500,000. Rearranging the formula to solve for P gives us P = PV / [1 - (1 + r)^-n] / r. Using the PVA factor from the table for n=20 and r=3% per quarter, we can calculate the payment amount, which is closest to option D, $33,608.

Husky Corporation Is Looking to Purchase a Building Costing $500,000