Question

Using the information provided, what transaction represents the best application of the present value of an annuity due of $1? A. Compass, Inc., signs a note of $32,000, which requires the company to pay back the principal plus interest in four years. B. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year. C. NYC Industries leases a car for 4 yearly annual lease payments of $12,000, where payments are made at the end of each year. D. Bahwat Company plans to deposit a lump sum of $100,000 for the construction of a solar farm in 4 years.

Answer 1

Answer: B. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year.

Explanation:

An Annuity refers to an equal series of cashflows made at constant intervals. For instance, paying $100,000 per year for 8 years.

There are two types of Annuities; Ordinary and Annuity Due. Annuity Due refers to annuities that are paid at the beginning of each year whereas Ordinary is paid at the end.

Falcon will be paying $100,000 at the beginning of the year so this is an Annuity due and so will be the best application of the present value of an annuity due of $1.