Question

You bought a new car and decided to buy an extended warranty a day later. The dealer offers you two alternative payment plans. The first plan requires a $2,000 immediate up-front payment. The second plan requires you to make monthly payments of $100.00, payable at the end of each month for 2 years. What nominal annual interest rate is built into the monthly payment plan?

		17.16%
		19.86%
		15.41%
		18.16%
		Cannot be determined

Answer 1

Annual Interest		15%			18%
Monthly interest		1.2500%			1.5000%
		1.25%			1.50%
		NPV@ 0.0125			NPV@ 0.015
Year	Cash flow	PV factor	PV-Cash flow		PV factor	PV-Cash flow
0	(2,000.00)	1.000	(2,000)		1.000	(2,000)
1	100.00	0.988	99		0.985	99
2	100.00	0.975	98		0.971	97
3	100.00	0.963	96		0.956	96
4	100.00	0.952	95		0.942	94
5	100.00	0.940	94		0.928	93
6	100.00	0.928	93		0.915	91
7	100.00	0.917	92		0.901	90
8	100.00	0.905	91		0.888	89
9	100.00	0.894	89		0.875	87
10	100.00	0.883	88		0.862	86
11	100.00	0.872	87		0.849	85
12	100.00	0.862	86		0.836	84
13	100.00	0.851	85		0.824	82
14	100.00	0.840	84		0.812	81
15	100.00	0.830	83		0.800	80
16	100.00	0.820	82		0.788	79
17	100.00	0.810	81		0.776	78
18	100.00	0.800	80		0.765	76
19	100.00	0.790	79		0.754	75
20	100.00	0.780	78		0.742	74
21	100.00	0.770	77		0.731	73
22	100.00	0.761	76		0.721	72
23	100.00	0.751	75		0.710	71
24	100.00	0.742	74		0.700	70
			62			3
		IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
			=1.25%+ (1.50%-1.25%)*(62/(62-3)
			1.513%
Annual Return=			1.513*12	18.15%
So option D is correct