Question

You can buy an item for $140 on an in-store payment plan with the promise to pay $140 in 90 days. Suppose you can buy an identical item for $128 cash. If you buy the item for $140, you are in effect paying $12 for the use of $128 for three months. What is the effective annual rate of interest

Answer 1

the effective annual rate of interest is 37.50%

Step-by-step explanation:

The computation of the effective annual rate of interest is as follows:

Interest = Principal × rate × time period

$12 = $128 × rate × 3 months ÷ 12 months

$48 = $128 × rate

rate = 37.50%

Hence, the effective annual rate of interest is 37.50%

We simply applied the above formula so that the correct annual rate could come