Question

Your client wishes to insure their Ferrari. Mooncorp Insurance has quoted an annual premium to insure the car of $15,000. Mooncorp offers a 5% discount if you pay the lump sum immediately. They also offer an alternative payment method. The account can be paid in full by making 12 equal start-of-the month payments of $1,400, rather than the lump sum, with the first payment due upfront. What is the effective annual opportunity cost of paying monthly? In other words, what interest rate is being charged if your client decides to use the repayment plan as opposed to the lump sum? You must provide one complete manual trial calculation of the IRR to demonstrate that you understand the process. Failure to follow this instruction will attract a mark of zero. (Rates as a percentage accurate to one basis point)

Answer 1