A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

Question

Quizplus · Accepted Answer

The first step is to calculate the total cost of the truck under both options.

Option 1: Pay $120,000 today
Option 2: Pay 6 yearly payments of $25,000 = 6 x $25,000 = $150,000

The total cost of the truck under option 2 is higher by $30,000 ($150,000 minus $120,000). This can be considered as the interest paid on the loan over six years.

To find the interest rate being offered, we can use the simple interest formula:

Interest = (Principal x Rate x Time)

We know that the principal is $120,000 and the interest is $30,000 over 6 years. Plugging these values into the formula, we get:

$30,000 = ($120,000 x Rate x 6)
Rate = 5%

Therefore, the closest answer choice to the interest rate being offered by the dealer is B) 7%.

A Businessman Wants to Buy a Truck