The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment? (Use the appropriate table in the text.) a. $1,720b. $2,154c. $1,994d. $1,466

The correct answer is B. $2,154

Explanation:

Provided data from the question

Present value of office equipment and furniture purchased = $8,600

Number of installments agreed = 5

Interest rate on installment payments = 8%

To determine the required annual installment payment, solve:

Present value = Annual payments * Present value of annuity factor at 8% and number of installment (5)

Present value of annuity factor = 1 - (1+r) ⁻ⁿ / r

where r = interest rate and n = number of installment agreed

Present value of annuity factor = 1 - (1+0.08) ⁻⁵ / 0.08

Present value of annuity factor = 3.99271

Therefore,

$8600 = Annual installment payment * 3.99271

= $8,600/3.99271

Annual installment payment = $2,154