Ziggy is considering purchasing a new car. The cash purchase price for the car is €35,000. What is the annual interest rate if Ziggy is required to make annual payments of €8,100 at the end of the next five years?

Question

Quizplus · Accepted Answer

We can use the present value annuity formula to solve for the interest rate:
PV = C * [(1 - (1 + r)^-n) / r]
where PV = present value (the cash purchase price of the car), C = annual payment, r = interest rate, and n = number of periods (in this case, 5 years). 
Plugging in the given values, we get:
35000 = 8100 * [(1 - (1 + r)^-5) / r]
Solving for r using trial and error or a financial calculator gives us approximately 5%, making choice B the best answer.

Ziggy Is Considering Purchasing a New Car