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:

The yearly rate of interest compounded annually is arrived at 6.96%, as shown below:

1 Given, 2 Cost of lift package 3 Cost of new tyres 4 Cost of tinted windows 5 Cost of spoiler 6 Therefore, total cost (Sum of all the above) 7 Interest to be paid after 5 years 8 Total payout after 5 years =$5000 + $2000= 9 thenLet the yearly interest rate be r%, then 5000*(1+r)^5= Or, (1+r)^5= 7000/5000 = (1+r)= fifth root of 1.45 Therefore, rate of interest r=1.069610376-1 = 14 Or, $2,000 $1,500 $500 $1,000 $5,000 $2,000 $7,000 10 $7,000 1.4 1.069610376 0.069610376 6.96%

Hence the answer is option d ie., 7.0%