choice A: pay 3100(.85) or 2635 now
choice B: pay 12 payments of 270
present value of the 12 payments at a monthly rate of i
= 270( 1 - (1+i)^-12)/i= 2635
hard to solve, let Wolfram do it for us
(I changed the i to x, since Wolfram thinks i = √-1 )
http://www.wolframalpha.com/input/?i=270%28+1+-+%281%2Bx%29%5E-12%29%2Fx%3D+2635
I said: i = .0333.. ----> wow, over 3% per month
or .3999.. per annum compounded monthly
but you wanted the effective annual rate
let that rate be j
1+j = (1.03333)^12
j = .482
The effective annual rate of the second plan is 48.2%
(in the middle ages they used to burn people at the stake for charging those rates, called usury )
Mooncorp Insurance has quoted you an annual premium to insure your car of $3100. You are offered a 15% discount if you pay the lump sum immediately. They also offer an alternative payment method. You can pay the account in full by making 12 equal beginning of the month payments of $270, rather than the lump sum. What is the effective annual opportunity cost of paying monthly?
You must provide one complete manual calculation of the IRR to demonstrate that you understand the process. Failure to follow this instruction will attract a mark of zero.
1 answer
1 answer