General Appliances (GA) offers you the following financing terms for a new washer and dryer with a price tag of $2,489: You make a down payment of $250 now and 36 consecutive monthly installments of $75 (the first payment is due in one month). What is the effective annual interest rate (EAR) implied in GA’s financing option? Note: To solve this problem use, for example, Goal Seek in Excel.
Select one:
a. 1.05%
b. 12.6%
c. 13.3%
d. 5.5%
e. 0.45%
f. 10.8%
g. 16.1%
h. 10.0%
NOTE: Please show all the work, without using EXCEL (Step by step with equations) Thanks!
We can use the present value of annuity formula to derive the effective annual interest rate (EAR) implied in GA’s financing option. | |||||||
Present value of annuity = P*{[1 - (1+r)^-n]/r} | |||||||
Present value of annuity = Price of washer and dryer - down payment = $2489 - $250 = $2239 | |||||||
P = monthly installment = $75 | |||||||
r = monthly interest rate = ? | |||||||
n = number of months payment = 36 | |||||||
2239 = 75*{[1 - (1+r)^-36]/r} | |||||||
29.85333 = [1 - (1+r)^-36]/r | |||||||
r = 0.0105 | |||||||
Monthly Interest rate = 1.05% | |||||||
Effective annual interest rate (EAR) implied in GA’s financing option = 1.05% * 12 = 12.6% | |||||||
The answer is Option b. | |||||||
General Appliances (GA) offers you the following financing terms for a new washer and dryer with...