Question

4. You want to give your car a "kick ass” look. You want to spend $2,000 on a lift-package, $1,500 on new tires, $500 on tinted windows, and $1,000 on a spoiler. However, you must borrow the money from your rich aunt “Tilly”, who says you have 5 years to pay back the loan and she expects $2,000 in cash interest. You wish to know if this is a reasonable fee, so you calculate the internal ROR on the loan from Aunt Tilly, which will be closest to? a. 5.5% C. 6.5% b. 6.0% d. 7.0%

Answer 1

Answer

loan amount =sum of all the spending =2000+1500+500+1000=5000=PV=present value

FV=future value =the amount to return =interest + loan=2000+5000=7000

n=years=5

i=interest rate

i=(FV/PV)^(1/n) -1

=(7000/5000)^(1/5) -1

=0.0696103757

=6.96%

=7.0%

Option d