What is the purchase price if Benjamin purchases a commercial building on 1/1/2011 and agrees to...

What is the purchase price if Benjamin purchases a commercial building on 1/1/2011 and agrees to pay the purchase price in seven installments of $16,000 with the first payment is due on 1/1/2012. Assuming an annual compounded implicit rate of 8%, what is the purchase price?

(PV annuity due of 1 is 5.62288) (FV ordinary annuity of 1 is 8.92280)

(PV ordinary annuity of 1 is 5.20637) (FV of annuity due of 1 is 9.63660)

	a.	$83,302
	b.	$89,966
	c.	$142,765
	d.	$154,185

Solutions

Expert Solution

Based on the information we can calculate the purchase price of the Commercial building for Benjamin as follows:-

Purchase price = Annual instalments * PV of ordinary annuity

Purchase price = $16,000 * 5.20637(per question)

Purchase price = $83,301.92

Purchase price = $83,302(Rounded)

Based on the calculation above, the correct answer is Option A - $83,302. We used the present value of the instalments in finding out the cost of the commercial building because the machine is purchased today and the value of dollar one is not the same as that of the value of a dollar tomorrow. Hence, we use the Present value interest factor table to find the relevant time factor and also since it is an annual payment , we use the present value of annuity payments in arriving the purchase price of the commercial building.

Option B is incorrect. Since the first payment is made after a year, we would not consider the PV of annuity due in arriving at the purchase price of the machine. Hence this option is incorrect.

Option C and Option D are incorrect because we would not use the Future value tables in order to calculate the price of the commercial building that has been purchased today even though the payments are made annually for 7 years.

ekkarill92 answered 1 year ago

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