Question

The bolded number is the answer. Please show me how to get this answer for the exam. Thank you.

7. You are getting a S3,000 loan from a dealership to buy a used car. The dealer has given you the choice between two different credit alternatives. The first one is a two-year financing deal, with payments of $142.60 per month. The other one is a three- year financing deal, with monthly payments of S100.83. Based on effective rate of interest calculations, which of the two loans in the previous question would you chose? 13.7829%, 13.6071%

Answer 1

Option 1 The value of annual interest can be computed using the TVM calculator. The user is required to pres CPT (1/y) to get the required result P/Y = 12 n = 24 PV = 3000 PMT = -142.60 CPT, I/Y = 12.9819% I_effective = (1 + 0.129819/12)^12 - 1 = (1.010818)^12 - 1 = 1.137829 - 1 = 13.7829% Option 2 The value of annual interest can be computed using the TVM calculator. The user is required to press CPT (I/Y) to get the required result P/Y = 12 N = 36 PV = 3000 PMT = -100.830 CPT, I/Y = 12.8256% I_effective = (1 + 0.128256/12)^12 - 1 = (1.010688)^12 - 1 = 1.136071 - 1 = 13.6071%