Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. in exchange for a building that now has a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?
A) Between 13% and 14%.
B) Between 7% and 8%.
C) Between 5.5% and 6%.
D) Cannot be determined from the given information.

Question

Quizplus · Accepted Answer

The interest rate is the rate that will provide a present value of $75 million when finding the amount of the annuity. That is, the present value of a 10-year annuity due of $10 million is $75 million, when the present value factor (from Table 6) equals 7.5000. That point is between 7% and 8% in the table.

Koko Company Pays $10 Million at the Beginning of Each