Question

Blue Inc. has completed the purchase of new Dell computers. The fair value of the equipment...

Blue Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $1,021,946. The purchase agreement specifies an immediate down payment of $248,000 and semiannual payments of $95,420 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
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Answer #1

Answer: 4% semiannually

Calclulations:

Fair value of the equipment $ 1,021,946
Less: Down payment $ -248,000
Present value of the semi-annual payments $ 773,946

Present value of the semi-annual payments = Semi-Annual payments x PVA(i, 10 periods)

PVA(i, 10 periods) = Present value of the semi-annual payments ÷ Semi-Annual payments

PVA(i, 10 periods) = $773,946 ÷ 95,420

PVA(i, 10 periods) =8.1109

Present value annuity factor of 8.1109 is matching at 4% in Present value annuity table for 10 periods.

Therefore, semi-annual interet rate is 4% & Annual rate is 8%

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