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.

Question

Quizplus · Accepted Answer

To find the interest rate, we need to calculate the present value of the payments made by Koko Company. Using a financial calculator, we get a present value of $49.3 million. 
PV (payment) = $10 million x [1 - 1/(1 + r)^10] / r 
PV (building) = $75 million 
PV (total) = $49.3 million + $75 million = $124.3 million

Using the formula for yield to maturity (YTM) of a bond, we can solve for the interest rate: 
PV = PMT x [1 - 1/(1 + r)^n] / r + FV / (1 + r)^n 
PV = $124.3 million 
PMT = -$10 million (negative because it's a payment) 
FV = 0 
n = 10 
Solving for r, we get approximately 7.23%, which falls within the range of B.

Koko Company Pays $10 Million at the Beginning of Each