Question

Coronado Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $708,769. The purchase agreement specifies an immediate down payment of $172,000 and semiannual payments of $66,179 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction

Answer 1

Answer: 8%

Explanation:

Fair value = $708,769

Down payment will be made so only the amount net of the down payment will be paid periodically.

= 708,769 - 172,000

= $‭536,769‬

Present value of Annuity interest factor for payment = 536,769/66,179

= 8.11087

No. of periods = 2 * 5years = 10 semi annums

Look at the Present value of interest factor of Annuity (PVIFA) table and find the interest rate that corresponds to 10 periods and gives an interest factor of 8.11087.

That interest rate is ⇒ 4%

As this is a semi-annual rate, the annual rate is;

= 4% * 2

= 8%