4. An automobile is “priced” at $7,000. A buyer may purchase the car for

$6,500 now or, alternatively, the buyer can make a down payment of $1,000 now and pay the remaining $6,000 in 8 equal quarterly payments (over two years) at 8% compounded quarterly.

a. If the buyer’s TVOM is 10% per year compounded quarterly, would the buyer prefer to pay the $6,500 outright, or make the down payment and the quarterly payments?

b. What is the effective annual interest rate at which these two payment options are equivalent?