Question

Cora is working to purchase a new truck that is currently listed for $30,600. She has been told that if she pays for the truck in cash, the price will be reduced to $26,000. If this is not possible, then the dealer will provide financing for $26,000. Under the terms of the financing, Cora will need to pay $6,512 at the end of each year for the next five years. If Cora makes the five annual payments, her interest rate will be __________.

Answer 1

Answer: 8%

Explanation: The present value of the ordinary annuity is $26,000 with periodic rent of $6,512 for five years.

Therefore, the PVFOA5,

i = $26,000/$6,512 = 3.99263. This corresponds to an interest rate of 8% based on the table for the present value of an ordinary annuity of 1