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Homework answers / question archive / Derek decides to buy a new car

Derek decides to buy a new car

Finance

Derek decides to buy a new car. The dealership offers him a choice of paying $507.00 per month for 5 years (with the first payment due next month) or paying some $28,321.00 today. He can borrow money from his bank to buy the car. What interest rate makes him indifferent between the two options?

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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 = $507

PV = $28,321

FV = $0

Substituting the values in formula:

= rate(60,507,-28321,0)

= 0.24%

Interest rate = Rate * 12

= 0.24% * 12

= 2.85%

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