CIMA BA2 · Chapter 12 · Question 11 of 13
A lender charges interest of 1.5% per month, compounded monthly. What is the equivalent annual interest rate, to two decimal places?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 19.56%
Explanation
Equivalent annual rate = (1 + monthly rate)^12 - 1 = (1.015)^12 - 1 = 1.1956 - 1 = 19.56%. Multiplying 1.5% by 12 (18%) ignores the compounding of interest each month.
More Investment appraisal MCQs
- Q13A company will pay $5,000 a year for 5 years to lease a machine, with each payment made IN ADVANCE (the first payment is made today). The…
- Q1A project costs $250,000 and is expected to generate cash inflows of $70,000 in year 1, $80,000 in year 2, $90,000 in year 3 and $60,000…
- Q2A project requires an investment of $120,000 now and will generate cash inflows of $40,000 a year for 4 years, starting in one year's…
- Q3A project costs $80,000 now and generates cash inflows of $30,000, $35,000 and $40,000 at the end of years 1, 2 and 3 respectively. The…
- Q4A project costs $120,000 now and will generate cash inflows of $40,000 a year for 4 years, starting in one year's time. At a 10% discount…