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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 $250 000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $5 000 (paid at the end of each month). Your firm can borrow at 5% APR with quarterly compounding.
-A 12% APR with bi-monthly compounding is equivalent to an EAR of
A)12.50%.
B)12.62%.
C)12.00%.
D)11.98%.

Question

Quizplus · Accepted Answer

The Effective Annual Rate (EAR) can be calculated using the formula for converting APR with different compounding periods to EAR: $EAR = (1 + \frac{i}{n})^n - 1$, where $i$ is the APR as a decimal, and $n$ is the number of compounding periods per year. For a 12% APR compounded bi-monthly (6 times a year), the calculation is $EAR = (1 + \frac{0.12}{6})^6 - 1$, which results in an EAR of approximately 12.62%.

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