Eric is considering buying a car. He can either purchase the car outright or make 5 annual payments of $10,000 at the end of each year. If the interest rate is 7%, how much is the outright purchase price?
A)$14,025.50
B)$7,129.90
C)$41,002.00
D)$57,863.70

Question

Quizplus · Accepted Answer

The outright purchase price is the present value of the 5 annual payments of $10,000 each, discounted at an interest rate of 7%. The present value of an annuity formula is used: PV = Pmt × [(1 - (1 + r)^-n) / r], where Pmt = $10,000, r = 0.07, and n = 5. This calculation results in approximately $41,002.

Eric Is Considering Buying a Car