Question

On March 31, 2018, the Freeman Company leased a machine. The lease agreement requires Freeman to pay 10 annual payments of $6,000 on each March31, with the first payment due on March 31, 2018. Assuming an interest rate of 10% and that this lease is treated as an installment sale, Freeman willinitially value the machine by multiplying $6,000 by which of the following factors?A)Present value of $1 at 10% for 10 periods.B)Present value of an ordinary annuity of $1 at 10% for 10 periods.C)Present value of an annuity due of $1 at 10% for 10 periods.D)Future value of an annuity due of $1 at 10% for 10 periods.

Answer 1

Correct answer is: Present value of annuity due of $1 at 10% for 10 periods

10 annual payments to be made each of $6000 with the Discount factor of Present value of annuity due of $1 at 10% for 10 periods Freeman will get the initial value (Present value which is to be paid in future)