Question

Jill Norris is presently renting a small business computer from Rice Office Equipment Company.   The agreement requires 10 annual payments of $2,000 at the end of each year and provides the computer owner (Rice) with an 8% return on its investment.

(a)   Assuming the computer has a ten-year life and will have no salvage value at the expiration of the agreement, what was the original cost of the computer to Rice?

(b) What amount would each payment be if the ten annual payments are to be made at the beginning of each period?

Answer 1

Ans:

a.

Calculation of cost of Computer:

Annual Payment : $2,000

Period : 10 Years

Rate : 8%

Annuity factor @8% for 10 Years : 6.71008 (Using factor table)

Cost of computer : $2,000 * 6.71008 = $13,420.16 or $13,420

b.

Annual Payments if payment made at the beginning:

Cost of computer : $13,420.16

Period : 10 Years

Rate : 8%

Annuity factor @8% for 10 Years (Payment beginning) : 7.24689 (Using factor table)

Annual Payments : $13,420.16 / 7.24689 = $1,851.85 or $1852

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