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Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding.
-The effective monthly discount rate that you should use to evaluate the truck lease is closest to:
A)0.487%.
B)0.498%.
C)1.500%.
D)1.535%.

Question

Quizplus · Accepted Answer

The effective monthly discount rate is the monthly interest rate that would be equivalent to the annual percentage rate (APR) with quarterly compounding. The APR is 6%, so the quarterly interest rate is 6%/4 = 1.5%. The effective monthly discount rate is then 1.5%/3 = 0.498%.

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