Recently Carla Estes was interested in purchasing a Honda Ac

Recently, Carla Estes was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either $28,900 cash or $7,400 at the end of each of 5 years. Compute the effective-interest rate to the nearest percent that Carla would pay if she chooses to make the five annual payments. (Round answer to 0 decimal places, e.g. 7%.)

Solution

Let the rate of interest be x%

At this rate;present value of annual payment=28900

28900=7400/1.0x+7400/1.0x^2+7400/1.0x^3+7400/1.0x^4+7400/1.0x^5

28900=7400[1/1.0x+1/1.0x^2+.............+1/1.0x^5]

[1/1.0x+1/1.0x^2+.............+1/1.0x^5]=(28900/7400)

[1/1.0x+1/1.0x^2+.............+1/1.0x^5]=3.9054(Approx).

Hence x=rate of interest=8.84%(Approx)

=9%(Approx).