Question

The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning immediately. The installment payments include interest at 8%. What is the required annual installment payment? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

a. $1,720
b. $2,154
c. $1,994
d. $1,466

Answer 1

The required annual installment payment for the Strug Company's office furniture and equipment purchase with a $8,600 present value at 8% interest rate over 5 years is approximately $2,154.

Step-by-step explanation:

To calculate the required annual installment payment for the office furniture and equipment purchased by the Strug Company, we need to use the Present Value of an Annuity (PVA) formula because the payments include interest. Since the company is making equal payments that include this interest, we're looking to find the annuity payment that corresponds to the present value of these future payments at an 8% interest rate.

The formula for the Present Value of an Annuity is as follows:
PV = Pmt * [1 - (1 + r)^-n] / r
Where:
PV = Present Value of the Annuity
Pmt = Annual payment
r = Interest rate per period
n = Number of periods.

In this scenario, we have:
PV = $8,600
r = 8% or 0.08
n = 5 years.

Using the tables or a financial calculator, we look up the factor for an annuity with these terms (n=5 years, r=8%). Let's assume that the factor is approximately 3.9927. Hence the calculation will be:
8600 = Pmt * 3.9927
Pmt = 8600 / 3.9927
Pmt ≈ $2,154.

Therefore, the annual installment payment will be approximately $2,154, which corresponds to option b.