An auto dealership is advertising that a new car with a sticker price of $34,128

Question

An auto dealership is advertising that a new car with a sticker price of $34,128 is on sale for $25,995 if payment is made in full, or it can be financed at 0% interest for 72 months with a monthly payment of $474. Note that 72 payments × $474 per payment = $34,128, which is the sticker price of the car. By allowing you to pay for the car in a series of payments (starting one month from now) rather than $25,995 now, the dealer is effectively loaning you $25,995. If you choose the 0% financing option, what is the effective interest rate that the auto dealership is earning on your loan? (Hint: Discount the payments back to current dollars, and use Goal Seek to find the discount rate that makes the net present value of the payments = $25,995.)

Enter your answer as a percentage. If required, round your answer to one decimal digit.

Explanation / Answer

PV = 25995, FV = 0, PMT = -474, N = 72

use rate function in Excel

monthly rate = 0.7849%

Effective annual rate = (1 + 0.7849%)^12 - 1 = 9.84%

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