Question

Jochebed wants to buy a piece of land, and the owner will sell it to her for R20 000 cash. Alternatively, he will let her pay for it with five annual installments of R5 000 each, the first one being due right now. What is the implied interest rate here?

Answer 1

Answer:25% interest or $5,000

5\100= .05

.05 / 20= .0025

5,000/1,000=0.5

0.5 / 20=.25

Explanation:

Answer 2

Explanation:

To determine the implied interest rate in this scenario, we can use the concept of present value (PV) and future value (FV).

If Jochebed decides to pay the full amount of R20 000 cash right now, then the PV is R20 000 and the FV is also R20 000. Therefore, the implied interest rate on this option is 0%.

If Jochebed decides to pay in five annual installments of R5 000 each, then the PV of the land is equal to the sum of the present values of each installment. Using the formula for present value of an annuity, we can calculate the PV as:

PV = R5 000 x ((1 - (1 + r)^-5) / r)

where r is the implied interest rate. Solving for r, we get:

r = 7.18%

Therefore, the implied interest rate on the installment plan is 7.18%.