You are considering buying a car from a local auto dealer. The dealer offers you one of two options:
Option1: You can pay $30,000 cash.
Option2 (The deferred payment plan): You can pay the dealer $5,000 cash today and a payment of $1,050 at the end of each of the next 30 months. As an alternative to the dealer financing, you have approached a local bank, which is willing to give you a car loan of $25,000 at the rate of 1.24 percent per month.
a. Assuming that 1.25 percent is the opportunity cost, calculate the present value of all the payments on the dealer’s deferred payment plan.
b. What is the effective interest rate being charged by the dealer?