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Derek decides to buy a new car
Derek decides to buy a new car. The dealership offers him a choice of paying $500.00 per month for 5 years (with the first payment due next month) or paying some $28,022.00 today. He can borrow money from his bank to buy the car. What interest rate makes him indifferent between the two options?
Expert Solution
We can calculate the interest rate by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Interest rate (monthly)
Nper = 5*12 = 60 periods (monthly)
Pmt = $500
PV = $28,022
FV = $0
Substituting the values in formula:
= rate(60,500,-28022,0)
= 0.23%
Interest rate = Rate * 12
= 0.23% * 12
= 2.72%
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