The cash price of a machine tool is $3,500. The dealer is also offering terms of: (i) $1,200 down payment and (ii) 24 end-of-month payments of $110 each. What effective annual interest rate is implied by the terms of this financing offer

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%.