Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with 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.That is, the present value of a 10-year annuity due of $10 million is $75 million, when the discount factor (from Table 6) equals 7.5000.That point is between 7% and 8% in the table.

Question

Quizplus · Accepted Answer

Based on Table 6, the present value of a 10-year annuity due of $10 million is $75 million when the discount factor is 7.5000. Using the formula for calculating the interest rate for an annuity due, the interest rate is approximately 7.18%. Since this value falls between 7% and 8% in Table 6, the best choice is B) Between 7% and 8%.

Koko Company Pays $10 Million at the Beginning of Each