Question

John bought a used truck for $4,500. He made an agreement with the dealer to put $1,500 down and make payments of $350 for the next 10 months. The extra cost paid by taking this deal is equivalent to what actual yearly rate of interest?

A. 36%
B. 63%
C. 33%
D. 3.6%

Answer 1

A. 36% is the answer.

Explanation:

Price of the used truck = $4500

Down payment = $1500

Money left to be paid =
`4500-1500=3000` dollars.

Now we have pv = $3000

p= $350

n = 10

Using the annuity formula:

`pv=p[(1-(1+r)^(-n) )/(r)]`

Putting the values in formula we get;

`3000=350[(1-(1+r)^(-10) )/(r)]`

`(3000)/(350)= [(1-(1+r)^(-10) )/(r) ]`

Solving this equation we get

r = 2.9% ≈ 3%

So, annual interest will be
`3*12=36`%

Hence, option A is the answer.