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:
A)$6,248.
B)$6,689.
C)$8,527.
D)$5,709.

Question

Quizplus · Accepted Answer

The first step is to calculate the quarterly interest rate. Since the incremental borrowing rate is an annual rate, we need to divide it by 4 to get the quarterly rate:
8% / 4 = 2%

Next, we can use the present value of an annuity formula to find the quarterly payment:
PMT = PV x (r / (1 - (1 + r)^-n))
where:
PV = present value = $49,000
r = quarterly interest rate = 2%
n = number of payments = 8 (4 payments per year for 2 years)

PMT = $49,000 x (0.02 / (1 - (1 + 0.02)^-8))
PMT = $6,689.10 (rounded to the nearest penny)

Therefore, the quarterly payment is closest to $6,689.

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