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Chapter 6: Question 18 Q (page 301)

Recently, Glenda Estes was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either \(27,600 cash or \)6,900 at the end of each of 5 years. Compute the effective-interest rate to the nearest percent that Glenda would pay if she chooses to make the five annual payments.

Short Answer

Expert verified

The effective interest rate that Glenda would pay will be 8% approximately.

Step by step solution

01

Definition of effective interest rate

Effective interest rate is defined as the annual interest on savings when the effect of compounding over time.

02

Calculation of the effective interest rate.

27,600=PVofanordinaryof$6,900forfiveperiodsat?percent27,6006,900=PVofordinaryannuityforfiveperiodsat?percent4.0=approximately8%

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Most popular questions from this chapter

Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor鈥檚 punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be \(1,000 per year for the first 5 years, \)2,000 per year for the next 10 years, and \(3,000 per year for the last 5 years. Following is each vendor鈥檚 sales package.

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