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Assume that you are going to buy a new car for $25,000. You will be able to make a down payment of $3,000. The remaining $22,000 will be financed by the dealer. The dealer computes your monthly payment to be $547.47 for 48 months of financing.
What is the dealer’s annual rate of return on this car loan? (%)

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Answer:

Annual rate of return on this car loan is 9.38%.

Explanation:

Annual rate of return is the compounding average rate for any fund or loan amount for one year time. It includes the compounding effect of the interest payment.

Price of the car = $25,000

Down payment = $3,000

PV of payment financed by dealer = $22,000

Monthly Payment = 547.47

Total Duration  = 48 months

$22,000 = $547.47(P/A, i,48)

i = 0.75% monthly

r= (0.75%)(12) = 9% yearly

ia= [ ( 1 + 0.0075 )^12 ] - 1

Annual Interest rate = 9.38%per year

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