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%
