Glenda Estes was interested in purchasing a Honda The salesp

Glenda Estes was interested in purchasing a Honda. The salesperson indicated that the price of the car was either $27,600 cash or $6,900 at the end of each of 5 years. What is the effective interest rate to the nearest percent that Glenda would pay if she chooses to make the five annual payments? Would you choose to pay upfront or yearly for 5 years?

Solution

Formula for loan amortization =A= [i*P*(1+i)^n]/[(1+i)^n-1] Amount A = periodical installment $6,900.00 P=Loan amount = $27,600.00 i= interest rate per period = required n=total no of payments 5 No. Hence 6900 = [i*27600*(1+i)^5]/[(1+i)^5-1] Or , [i(1+i)^5]/[(1+i)^5-1]=0.25 Or i=8% approx