Derek decides to buy a new car. The dealership offers him achoice of paying $573.00...

Derek decides to buy a new car. The dealership offers him a choice of paying $573.00 per month for 5 years (with the first payment due next month) or paying some $28,774.00 today. He can borrow money from his bank to buy the car. What interest rate makes him indifferent between the two options?-Round answer 2 decimal places.

Expert Solution

Formula: The present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The cummulative amount available at Present) 28,774

C= Periodic cash flow. 573

r =effective interest rate for the period.

n = number of periods. 5*12 = 60

28,774 = 573× [1-(1+r)^-60]/r

r = 0.603189% per month.

Annual rate = 0.603189*12 = 7.24%

Answer: Interest rate which makes indifferent between the two options is 7.24%

jeff jeffy answered 2 years ago

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