You need to borrow $12,000 to buy a car, so you visit two banks and are given two alternatives. The first bank allows you to pay $2595.78 at the end of each year for six years. The first payment is to be made at the end of the first year. The second bank offers equal monthly loan payments of $198.87, starting at the end of first month. What are the interest rates that the banks are charging? Which alternative is more attractive?
What will be an ideal response?
12,000 = 2595.78 (P/A, i%, 6)
(P/A, i%, 6) = 4.622887
From Table 20.9 -- i ? 8%
12,000 = 198.87 (P/A, i%, 72)
(P/A, i%, 72) = 60.3409
Using Equation:
and by trial and error i ? 6% with ieff ? 6.17%
The second alternative is better.
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