Ms.Dunlap has just won the big bingo prize.She has two options for receiving her prize.She can either take a $1,050 now or two installments of $550, one now and one next year.At what interest rate would the two payments be equivalent?
A)4.75 percent.
B)8.25 percent.
C)10 percent.
D)15 percent.

Question

Quizplus · Accepted Answer

To find the equivalent interest rate, we use the present value formula. The present value of the two installments option is the sum of the first installment plus the present value of the second installment. Setting this equal to the single payment option, $1050 = $550 + $550 / (1 + r), where r is the interest rate. Solving for r gives an interest rate of 10 percent.

MsDunlap Has Just Won the Big Bingo Prize