Question

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. 3.6%
B. 63%
C. 33%
D. 36%

Please provide an explanation, thanks! :)

Answer 1

(D) 36%

Explanation:

Actual cost of truck = $4500

Down payment = $1500

Money left to be paid = 4500-1500 = $3000

A = Monthly payments = 350

n = 10

Principal value (P) = 3000

Using formula,

A=
`(Pr(1+r)^(n))/((1+r)^(n)-1)`

350 =
`(3000r(1+r)^(10))/((1+r)^(10)-1)`

= 36% (approx)

Hence (D) is correct.