On January 1, year 1, Robert Harrison signed an agreement to operate as a franchisee of Perfect Pizza, Inc. for an initial franchise fee of $40,000.  Of this amount, $15,000 was paid when the agreement was signed and the balance is payable in five annual payments of $5,000 each beginning January 1, year 2. The agreement provides that the down payment is not refundable and no future services are required of the franchisor.  Harrison’s credit rating indicates that he can borrow money at 12% for a loan of this type.  Information on present and future value factors is as follows:

Present value of $1 at 12% for 5 periods                                           .567

Future amount of $1 at 12% for 5 periods                                        1.762

Present value of an ordinary annuity of $1 at 12% for 5 periods          3.605

Harrison should record the acquisition cost of the franchise on January 1, year 1, at

B. $29,175

C. $40,000

D. $44,050