Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years.The first payment is due three months after the purchase date.Husky's incremental borrowing rate is 12%.Each of the payments is closest to: (FV of $1,PV of $1,FVA of $1,and PVA of $1) (Use the appropriate factor(s) from the tables provided. )

A) $28,000.
B) $66,940.
C) $37,981.
D) $33,608.

Question

Sitrina Alber · Accepted Answer

Final Answer : D, Explanation :  To find the payment amount, we use the Present Value of an Annuity (PVA) formula since the payments are equal and occur at regular intervals. The formula is PVA = P * [1 - (1 + r)^-n] / r, where P is the payment, r is the periodic interest rate, and n is the total number of payments. Given a 12% annual interest rate, the quarterly rate is 3% (12% / 4). The total number of payments over five years, with quarterly payments, is 20 (5 years * 4 quarters). The present value (PV) is the cost of the building, $500,000. Rearranging the formula to solve for P gives us P = PV / [1 - (1 + r)^-n] / r. Using the PVA factor from the table for n=20 and r=3% per quarter, we can calculate the payment amount, which is closest to option D, $33,608.

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