Question

You buy a stove for​ $1500 on February 20. The store gives you 4 months​ “interest free”, after which you must pay the​ $1500. ​ However, the store charges an administration fee of​ $50, to be paid today. What rate of simple​ interest, r, are you being charged for this​ “interest free”​ plan? The answer is 10.49% according to my prof, but i dont know how to get it

Answer 1

Answer;

Current price = $1500

Assume down payment (administration charge) = $50

Loan amount (present value) = $1450

Interest amount = $1500 - $1450 = $50

Interest amount after 4 month = $50

Rate of interest =?

Period = 4 month

N = 12 month

Formula;

Interest amount (simple interest) = principle amount x rate x time

$50 = $1450 x r x 4/100x12

60,000 = 5800 r

r = 60000/5800

r = 10.3448

= 10.3448% or 10.35% per annum

Cross check

Compounded amount after 4 month with simple interest = $1450 x 10.3448 x 4 month/100x12 + 1450

= $1500

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