A student must decide to pay for auto insurance on a monthly or an annual basis. If paid...

Question:

A student must decide to pay for auto insurance on a monthly or an annual basis. If paid annually, the cost is $1,650. If paid monthly, the cost is $150 at the start of each month.

What is the rate of return for buying the insurance on an annual basis?

Present Value Discounting and the Rate of Return:

Often, service providers will offer a discount on the total amount paid for their service(s) if the user agrees to pay the costs all at once rather than spread out over monthly payments. This could be viewed as an investment opportunity for a person who wants to reduce their overall costs by paying the lump-sum amount up front.

Answer and Explanation:

Given the conditions set by this problem, paying the insurance premium on an annual basis yields an annual rate of return of 19.476%.

If the student...

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How to Calculate the Rate of Return: Definition, Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 30
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