Question

You are going to buy a new car worth $23,800. The dealer computes your monthly payment to be $519.55 for 60 months of financing. What is the dealer's effective rate of return on this loan transaction? The dealer's effective rate of return is %. (Round to one decimal place.)

Answer 1

Let monthly rate of retun be i%

then

23800 = 519.55 * (P/A, i%,60)

(P/A, i%,60) = 23800 / 519.55 = 45.808873

using trail and error method

When i = 1%, value of (P/A, i%,60) = 44.955038

When i = 0.75%, value of (P/A, i%,60) = 48.173374

using interpolation

i = 0.75% + (48.173374 - 45.808873) / (48.173374 - 44.955038) *(1% - 0.75%)

i = 0.75% + 0.183674% = 0.933674%

Effective interest rate = (1+0.00933674)^12 - 1 = 1.117977 - 1 = 0.117977 = 11.8%