Detailed Answer
(b) The requirement is to determine what time value of
money concept would be used to determine the cost of a machine
when a payment (principal plus interest) is to be made in
two years. Answer (b) is correct because the cost of the machine
is to be recorded immediately; therefore, the cost of the present
value of a lump-sum payment would be used. Answer (c) is incorrect
because a future amount would be used in computing the
payment and not the cost of the machine. Also, a lump-sum
payment is involved and not an annuity. Answer (d) is incorrect
because a future amount would be used in computing the payment
and not the cost. Answer (a) is incorrect because a lumpsum
payment is involved, not an annuity.