There are two purchasing plans to procure some office equipm

There are two purchasing plans to procure some office equipment: Plan A: Pay the entire amount owed now using $6,000 cash. Plan B: Make a down payment of $1,000 now followed by 24 end-of-month payments of $220. . The effective interest rate that these two plans are equivalent is closest to: O a. 0.44% b. 5.42% O c. 5.28% -. d. 5.00%

Solution

Let the monthly interest rate be r

Present value of plan A = $6,000

Present value of annuity = Annuity amount*{1-(1+r)^-n}/r

Present value of Plan B = $1,000 + $220*{1-(1+r)^-24}/r

Hence, $6,000 = $1,000 + $220*{1-(1+r)^-24}/r

$220 - $220*(1+r)^-24 = $5,000*r

Solving above r = 0.4406%

Effective annual interest rate = 1.004406¹² - 1 = 0.05417 = 5.42%

Hence, correct answer is b. 5.42%