Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years. The first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. Each of the annual payments is closest to:
A)$65,098.
B)$86,821.
C)$55,098.
D)$44,000.

Question

Quizplus · Accepted Answer

The present value of the annual payments is $500,000 - $100,000 = $400,000. The present value of an annuity due for 10 years at 10% is 6.14457. Therefore, each of the annual payments is $400,000 / 6.14457 = $65,098.

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