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Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $250 000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $5 000 (paid at the end of each month). Your firm can borrow at 5% APR with quarterly compounding.
-An 8.5% APR with monthly compounding is equivalent to an EAR of
A)8.77%.
B)8.47%.
C)8.84%.
D)8.51%.

Question

Quizplus · Accepted Answer

The EAR (Effective Annual Rate) can be calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal rate, n is the number of compounding periods per year, and t is the number of years. For an 8.5% APR with monthly compounding, the EAR is approximately 8.84%.

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