Copyright © 2008, The McGraw-Hill Companies, Inc.
b. The approximation formula
- For the lawnmower installment plan described in Exercise 2, fi nd the APR by using:
a. A spreadsheet amortization table
b. The approximation formula - In each of Exercises 13 to 16, the APR is calculated in two different ways, and the two different methods give two
different answers. Which rate, the one calculated from the spreadsheet or the one calculated from the formula, would
you consider to be the more accurate one? Why?
D. Grab Bag
- Joyce bought a sleeper sofa for $953 on an installment plan. The plan calls for $35 down and the rest to be paid off
with 24 monthly payments. The simple interest rate is 7½%.
a. Calculate Joyce’s monthly payment.
b. Calculate this plan’s APR, using the approximation formula. - A farmer bought some equipment for $20,000. He and the seller agreed to a 5-year installment plan with monthly
payments, and a 25% carrying charge. Find the monthly payments. - Use the approximation formula to calculate an APR for a 30-month installment plan with a 9% simple interest rate.
- Mark bought a plot of land for $80,000. He and the seller agreed to a 10-year installment plan, with a 6.25% simple
interest rate.
a. Calculate Mark’s monthly payment.
b. Calculate the APR for this plan, using the approximation formula.
c. If Mark made this purchase by taking out a mortgage, with an amortized loan, with the same monthly payments,
what would the interest rate be? - Find the weekly payment on a 26-week installment plan with an initial balance of $500 and an 8% carrying charge.
- Shelly is considering a rent-to-own plan for a new stove and range. The cash price to buy it would be $895. A rent-to-
own plan would require 36 monthly payments of $28.75. Calculate the interest rate that would be equivalent to this
plan using either an amortization spreadsheet or the approximation formula.
E. Additional Exercises
- Visit a rent-to-own store in your area and see what the monthly payments would be for a few items (choose any items
that interest you.) How does the rent-to-own payment plan compare to other options? What sorts of interest rates are
built into the rental rates they offer?
Exercises 10.3 457