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Sharon's new leather jacket: Time value of money and calculation of rate of interest.

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Sharon buys a new leather jacket on credit. The cost of the jacket is $500 and has to be fully paid within 30 days.

But if she pays within 7 days she has to pay only $495.

Calculate the implicit annual rate of interest of the above transactions.

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Solution Summary

The solution shows all the calculations together with a good explanation of the time value of money as it relates to the cost of Sharon's new leather jacket.

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According to the concept of time value of money $1 today is more valuable than $1 tomorrow. Therefore we would delay our payment to the last day possible if we ...

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