Durban Corporation is interested in acquiring a machine that it can buy for $140,000 in cash. Alternatively, Durban can make five equal payments of $40,000 each, the first one due after one year, to purchase the same machine. Find the implied interest rate in the second option.

 Durban Corporation is interested in acquiring a machine that it can buy for $140,000 in cash. Alternatively, Durban can make five equal payments of $40,000 each, the first one due after one year, to purchase the same machine. Find the implied interest rate in the second option. 

Answer

Answer

Equal payments = $40,000, Number = 5, rate =?

FV =140,000

PV = annuity x annuity discount factor

140,000 = 40,000 [1-(1+r)^-5]/r]

Here

[1-(1+r)^-5]/r] = annuity discount factor

140,000/40,000 = annuity discount factor

3.50 = annuity discount factor

So the rate is almost 13% in this method.

In excel it is coming 13.20%