Posted: 2/15/2010 2:50:45 PM EDT
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Terry Martinez is considering taking out a loan to purchase a desk. The furniture store manager rarely finances purchases, but will for Terry "as a special favor". The rate will be 10% per year, and because the desk cost $600, the interest will come to $60 for a one year loan. Thus, the total price is $660 and Terry can pay it off in 12 installments of $55 each.
Use the interest rate of 10% per year to calculate the net present value of the loan. (Remember to convert to a monthly interest rate) Based on this interest rate, should Terry accept the terms of the loan? TI 84 npv (10, 660, {55},{12}= $1034.75.............if he is only paying $660 total...... where under these conditions.....should'nt he be paying $1034.75. http://www.youtube.com/watch?v=qJ95zEqWid8 |
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and failure at linking
http://www.youtube.com/watch?v=qJ95zEqWid8 |
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Quoted:
Based on this interest rate, should Terry accept the terms of the loan? No, he should not. No one needs a desk that bad. A $60 folding leg table or an old door will do until Terry can get his lazy ass to save $600 and buy it without paying interest for something that will *never* go up in value over time. Sure, maybe he can deduct the interest or depreciate the desk, but $600 isn't that much to save or earn. You're welcome. 
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Quoted:
No, he should not. No one needs a desk that bad. A $60 folding leg table or an old door will do until Terry can get his lazy ass to save $600 and buy it without paying interest for something that will *never* go up in value over time. Staying out of debt is an underutilized principle. |
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Quoted:
Terry Martinez is considering taking out a loan to purchase a desk. The furniture store manager rarely finances purchases, but will for Terry "as a special favor". The rate will be 10% per year, and because the desk cost $600, the interest will come to $60 for a one year loan. Thus, the total price is $660 and Terry can pay it off in 12 installments of $55 each. Use the interest rate of 10% per year to calculate the net present value of the loan. (Remember to convert to a monthly interest rate) Based on this interest rate, should Terry accept the terms of the loan? TI 84 npv (10, 660, {55},{12}= $1034.75.............if he is only paying $660 total...... where under these conditions.....should'nt he be paying $1034.75. http://www.youtube.com/watch?v=qJ95zEqWid8 If the contract says "total price is $660....12 payments of $55 each", that is that. No sense in doing fancy schmancy 10%/12months = blah blah times $660 etc. 12 payments of $55, only Terry can decide if he will/shall accept the terms. Would I accept them? Don't need a desk right now, so no thanks. 
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Quoted: Terry Martinez is considering taking out a loan to purchase a desk. The furniture store manager rarely finances purchases, but will for Terry "as a special favor". The rate will be 10% per year, and because the desk cost $600, the interest will come to $60 for a one year loan. Thus, the total price is $660 and Terry can pay it off in 12 installments of $55 each. Use the interest rate of 10% per year to calculate the net present value of the loan. (Remember to convert to a monthly interest rate) Based on this interest rate, should Terry accept the terms of the loan? Terry is a dumbass. CL has a whole page of free desks, 11 listed just today |
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Quoted:
Quoted:
Terry Martinez is considering taking out a loan to purchase a desk. The furniture store manager rarely finances purchases, but will for Terry "as a special favor". The rate will be 10% per year, and because the desk cost $600, the interest will come to $60 for a one year loan. Thus, the total price is $660 and Terry can pay it off in 12 installments of $55 each. Use the interest rate of 10% per year to calculate the net present value of the loan. (Remember to convert to a monthly interest rate) Based on this interest rate, should Terry accept the terms of the loan? TI 84 npv (10, 660, {55},{12}= $1034.75.............if he is only paying $660 total...... where under these conditions.....should'nt he be paying $1034.75. http://www.youtube.com/watch?v=qJ95zEqWid8 If the contract says "total price is $660....12 payments of $55 each", that is that. No sense in doing fancy schmancy 10%/12months = blah blah times $660 etc. 12 payments of $55, only Terry can decide if he will/shall accept the terms. Would I accept them? Don't need a desk right now, so no thanks.
Interest problems are easy to do if you have Excel or another spreadsheet program. You don't need interest formulas at all. a1 "Starting Balance" b1 "Payment" c1 "Balance" d1 "Balance + Interest" a2 600 b2 55 c2 =a2-b2 d2 =C3*(1+0.1/12) a3 =d2 b3 55 c3 =A3-B3 d3 =C3*(1+0.1/12) Then copy cells a3 to d3 down through row 13. I believe he overpays by about $34.04 (compared to if monthly compoounding was used) because his balance has decreased each month. But the problem gives no reason to compare to monthly compounding. Why not compare to instantaneous compounding. It's a poorly explained problem. |
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Want a real answer? He's paying the interest for the full amount for the full year: 10% x $600. Since's he's paying it off monthly, though, he shouldn't HAVE to pay interest on the full amount for the entire year. He should not take the loan. If he has to "pre pay" the entire interest amount, then he shouldn't have to make any monthly payments, but just pay the full lump sum at the end of the year.
Rob |