Question

Derek decides to buy a new car. The dealership offers him a choice of paying $532.00 per month for 5 years (with the first payment due next month) or paying some $28,528.00 today. He can borrow money from his bank to buy the car. What interest rate makes him indifferent between the two options? ( round to 3 decimal places as a percentage). (i.e 1.234%).

Answer 1

		Amount Principal	$28528
		Let Discount the Cash Flows @ 0.50% per month and 0.35% per month
					In $
Month	Amount	Cumulative Discounting Factor @0.50%	Cumulative Discounted Values @0.50%	Cumulative Discounting Factor @0.35%	Cumulative Discounted Values @0.35%
1 to 60	532	51.726	27518.00	54.034	28746.01
		PVCO	27518.00	PVCO	28746.01
		Amount Principal	$28528
		Rate Of Interest = 0.35% + 0.15%*218.012/1228.01
		Rate of Interest per month = 0.376629%
		Rate Of Interest Per annum = 4.519% Will be Indiference rate of Interest