Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make 6 equal payments, 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.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 discount factor (from table 6) is 5.21236.Dividing $1 million by this factor gives payments of $191,852.

Question

Quizplus · Accepted Answer

We can use the present value of an annuity due formula to compute the annual payments. The present value is $1 million, n=6, and i=6%. Using the discount factor from table 6, which is 5.21236, we can divide $1 million by this factor to get the annual payments of $191,852. Therefore, the best choice is D.