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You wish to insure your Ferrari. Mooncorp Insurance has quoted you an annual premium to insure your car of $12915. You are offered a 12% discount if you pay the lump sum immediately.

They also offer an alternative payment method. You can pay the account in full by making 11 equal end-of-the month payments of $1174, rather than the lump sum, with no payment in the first month (ie the first payment is at the end of the second month followed by ten further monthly payments).

What is the effective annual opportunity cost of paying monthly? In other words, what interest rate are you being charged if you decide to use the repayment plan as opposed to the lump sum?

You must provide one complete manual trial calculation of the IRR to demonstrate that you understand the process. Also provide an explanation of this opportunity cost. Failure to follow this instruction will attract a mark of zero.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93046091

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