Question

Flounder Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $923,048. The purchase agreement specifies an immediate down payment of $224,000 and semiannual payments of $86,186 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

Interest rate _____ % semiannually

Answer 1

To calculate the interest rate used in discounting this purchase transaction, we can use the present value formula. The fair value of the equipment is $923,048, and we have an immediate down payment of $224,000. The remaining balance after the down payment is $699,048. Now, we can calculate the present value of the semiannual payments for 5 years. The interest rate used in discounting this purchase transaction is approximately 8.72%.

Step-by-step explanation:

To calculate the interest rate used in discounting this purchase transaction, we can use the present value formula. The fair value of the equipment is $923,048, and we have an immediate down payment of $224,000. The remaining balance after the down payment is $923,048 - $224,000 = $699,048.

Now, we can calculate the present value of the semiannual payments for 5 years. The formula for present value is: PV = C / (1 + r)^n, where PV is the present value, C is the cash flow, r is the interest rate, and n is the number of periods.

In this case, we have C = $86,186 and n = 5 years * 2 = 10 periods. We need to find the interest rate (r). By plugging in the values, we have:

$699,048 = $86,186 / (1 + r)^10

Solving for r gives us approximately 4.36%. Since the interest rate is semiannual, the interest rate used in discounting this purchase transaction is approximately 4.36% * 2 = 8.72%.