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

To find the interest rate being offered, we need to compare the total amount paid in both scenarios:

If the businessman pays $120 000 now, the total cost is $120 000.

If the businessman pays six yearly payments of $25 000, the total cost is $150 000 ($25 000 times 6).

Therefore, the interest being charged is the difference between the two amounts, which is $30 000. We can calculate the interest rate using the simple interest formula:

Interest = Principal x Rate x Time

$30 000 = $120 000 x Rate x 1 (assuming one year for simplicity)

Rate = $30 000 / $120 000 = 0.25 or 25%

However, this interest rate is for one year. To find the interest rate being offered by the dealer, we need to find the annual percentage rate (APR), which takes into account the fact that the payments are spread out over six years.

We can use an online APR calculator or a formula to find the APR. Using the formula:

APR = ((1 + Interest / Number of Years) ^ Number of Years - 1) x 100%

APR = ((1 + 0.25 / 6) ^ 6 - 1) x 100%

APR = 7.33%

Therefore, the closest answer is C: 7%.

A Businessman Wants to Buy a Truck