Question

Given Cash price sale: $3 million, or a down payment of $ 500,000 with 6 yearly payments of 500,000

the company bought one truck and made a down payment of $ 1 million. The manufacturer charged the same interest rate used in his advertised offer. How much will the company pay each year for 6 years? What effective interest rate is being charged?

Answer 1

The company as per the advertisement charged :

Asset value - $ 3,000,000

Down payment - $ 500,000

yearly payment - $ 500,000

total payment = 500,000 + (500,000 * 6) = 3,500,000

Interest charged = 3,500,000 - 3,000,000 = $ 500,000

Interest rate = 500,000 / 3,000,000 = 16.66%

Actual scenario,

Asset value - $ 3,000,000

Down payment - $ 1,000,000

yearly payment (@ 16.66%) - $ 416,667

Therefore, the company will pay $ 416,667 each year for 6 years with an effective interest rate of 16.66%.