Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.
A) $166,651.
B) $135,252.
C) $203,351.
D) $191,852.

Question

Quizplus · Accepted Answer

We compute the annual payments in the present value of an annuity due formula, where the present value is $1 million, n = 6 and i = 6%. The present value factor (from table 6) is 5.21236. Dividing $1 million by this factor gives payments of $191,852.