A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

Question

Quizplus · Accepted Answer

The annual payment is calculated using the present value of an annuity formula. The correct annual payment would be $40,000 divided by the annuity factor (2.4869), which is approximately $16,086, not $12,000.

A Company Borrows $40,000 and Issues a 3-Year, 10% Installment