Question

An auto dealership is advertising that a new car with a sticker price of $35,208 is on sale for $25,995 if payment is made in full, or it can be financed at 0% interest for 72 months with a monthly payment of $489. Note that 72 payments × $489 per payment = $35,208, which is the sticker price of the car. By allowing you to pay for the car in a series of payments (starting one month from now) rather than $25,995 now, the dealer is effectively loaning you $25,995. If you choose the 0% financing option, what is the effective interest rate that the auto dealership is earning on your loan? (Hint: Discount the payments back to current dollars, and use Goal Seek to find the discount rate that makes the net present value of the payments = $25,995.) Enter your answer as a percentage. If required, round your answer to one decimal digit.

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Answer 1