I'm taking an introductory course in finance but I don't understand how to do this question:
A used car may be purchased for 7600 cash or 600 down and 20 monthly payments of 400 each,the first payment to be made in 6 months. What annual effective rate of interest does the installment plan use?
What I tried to do was equate the 7600 to the discounted value of the monthly payments, plus the 600, but I'm not sure how to solve for 'i'. This is the equation I have now: 7600 = 400 x [1-(1+i)^-20]/i + 600
You have not taken account of the delay in receiving payments. There should be another factor $(1+i)^{-5}$ to take account of the five months with no payments. Then solving for $i$ requires a numeric approach. A spreadsheet will do it for you or you can use bisection. $i=0$ is too low and you can easily find an $i$ that is too high. Then compute it at the center point and see if it is too low or too high.