John bought a used truck for $4,500. He made an agreement with the dealer to put $1,500 down and make payments of $350 for the next 10 months. The extra cost paid by taking this deal is equivalent to what actual yearly rate of interest?
A. 36%
B. 63%
C. 33%
D. 3.6%

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chisnau chisnau · Answer 1 · 2019-08-14T00:46:10+02:00

Answer:

A. 36% is the answer.

Step-by-step explanation:

Price of the used truck = $4500

Down payment = $1500

Money left to be paid = [tex]4500-1500=3000[/tex] dollars.

Now we have pv = $3000

p= $350

n = 10

Using the annuity formula:

[tex]pv=p[\frac{1-(1+r)^{-n} }{r}][/tex]

Putting the values in formula we get;

[tex]3000=350[\frac{1-(1+r)^{-10} }{r}][/tex]

[tex]\frac{3000}{350}= [\frac{1-(1+r)^{-10} }{r} ][/tex]

Solving this equation we get

r = 2.9% ≈ 3%

So, annual interest will be [tex]3\times12=36[/tex]%

Hence, option A is the answer.