Answer:
The effective annual interest rate of this deal is of 4.85%.
Explanation:
Considering that the cash price is $3,500, and that the two-year financed price rises to $3,840 (1,200 + 110 x 24), we have a price surplus of $340, which arises from the interest imposed by the financing.
To know the percentage of interest that is being applied, we must carry out the following cross multiplication, and divide the result of said multiplication by 2 (because the annual interest is being paid over two years):
3,500 = 100
340 = X
(340 x 100) / 3,500 = X
34,000 / 3,500 = X
9.7 = X
9.7 / 2 = Annual interest rate
4.85 = Annual interest rate
As we can see, the effective annual interest rate of this deal is of 4.85%.
