Question

On October 1, 2013, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2014. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at: the answer is 1847950. my question is, to solve this question you use the beginning mode on your calculator and you plug in pmt= 500k, n=5, i/y= 11, fv=0 and CPT PV. however, when I plug the numbers in beginning mode I get the wrong answer and when I plug it in end mode I get the right answer. my q is, isn't this an annuity due problem, since the payments are being payed on the beginning of each month, so why doesn't beginning mode work and why is it an end mode question ?

Answer 1

Solution:

The date of purchase of the equipment is October 1, 2013 and the date of first payment is Oct 01, 2014. The first payment is made a year later. So we treat it as ordinary annuity, hence we need to plug in ending mode. Treat as annuity due only when the payment is made immediately, in this case only if the payment was made on Oct 01 2013, we would have treated as annuity due. Here the payment is made a year later, hence ordinary annuity (ending mode)

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