Question

7. Sarah bought a lawnmower for $320. She signed up for the buy now pay later plan at the store with the following conditions: $100 down and payments of $25 for the next 12 months. The extra cost paid by taking this plan is equivalent to what actual yearly rate of interest? A. 65% B. 85% C. 67% D. 25%

Answer 1

Answer:  D. 25%

Step-by-step explanation:

Here the present value, PV = $320 - $ 100 = $ 220

Total number of period, n = 12

And, Payment per month, P = $25

Therefore, the amount he paid in 12 months = 25×12 = 300

Thus, the extra amount he paid = 300 - 220 = $80

So, the more amount he paid than the actual amount = $\frac{80}{320} \times 100=\frac{8000}{320}= 25\%$

Thus, she paid 25 % extra.

Answer 2

Amount financed
320−100=220

Total paid
100+25×12=400

Interest paid
400−320=80

Interest rate=(2yc)÷(m (n+1))
I=(2×12×80)÷(220 (12+1))
I=(2×12×80)÷(220×13)
I=0.67×100
I=67%