Question

Ziggy is considering purchasing a new car. The cash purchase price for the car is $47913. What is the annual interest rate if Ziggy is required to make annual payments of $12000 at the end of the next five years? Use Factor Table.

8%.

11%.

6%.

10%.

Answer 1

The correct answer is 8% which is calculate as below:-
Lets try at 10% and see whether we are getting cash purchase price for the car is $47913
Year	Annual payment	Interest rate	Cash purchase price
1	12,000	0.91	10,909
2	12,000	0.83	9,917
3	12,000	0.75	9,016
4	12,000	0.68	8,196
5	12,000	0.62	7,451
	Cash purchase price		45,489
We have seen that cash purchase price is lower at 10% interest rate which means we should test it at lower interest rate
Let's try it at 8%
Year	Annual payment	Interest rate	Cash purchase price
1	12,000	0.93	11,111
2	12,000	0.86	10,288
3	12,000	0.79	9,526
4	12,000	0.74	8,820
5	12,000	0.68	8,167
	Cash purchase price		47,913
Hence, interest rate is 8%