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 |

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