Suppose you buy a sleek Italian racing automobile (e.g. Fiat) and you have the choice of...
Suppose you buy a sleek Italian racing automobile (e.g. Fiat) and you have the choice of paying the full price, $41,000, now; or $10,000 at the end of each of the next five years. What is the cost of capital, or the implied interest rate, that makes the two methods equivalent?
Homework Answers
Let interest rate be x%
At this rate;present value of annual payments=41000
41000=10,000/1.0x+10,000/1.0x^2+10,000/1.0x^3+10,000/1.0x^4+10,000/1.0x^5
Hence x=interest rate=7%(Approx)
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