Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years.The first payment is due three months after the purchase date.Huck's incremental borrowing rate is 8%.Each of the payments is closest to: (FV of $1,PV of $1,FVA of $1,and PVA of $1)(Use the appropriate factor(s)from the tables provided. )
A)$6,248.
B)$6,689.
C)$8,527.
D)$5,709.

Question

Quizplus · Accepted Answer

To calculate the payment amount, we can use the formula for the present value of an annuity:

PV = PMT * ((1 - (1 / (1 + r)^n)) / r)

Where PV is the present value, PMT is the payment amount, r is the interest rate per period, and n is the total number of periods.

In this case, we want to find the payment amount, so we can rearrange the formula:

PMT = PV / ((1 - (1 / (1 + r)^n)) / r)

The present value of the truck is $49,000, and we will make payments every 3 months for 2 years (8 quarters), so n = 8. The incremental borrowing rate is 8%, so r = 2%. Plugging these values into the formula, we get:

PMT = 49,000 / ((1 - (1 / (1 + 0.02)^8)) / 0.02) = $6,688.53

Rounding to the nearest dollar, the payment amount is closest to $6,689, which is answer choice B.

Huck Corporation Is Looking to Purchase a Truck Costing $49,000