Ace Furniture will give you 8 months, interest free, before you have to pay for a $2,000 sofa. Based on the fact that Ace pays 14% on its short term debt, what would be a reasonable amount of cash for you to offer them at the time of purchase?
A) $2,187
B) $1,829
C) $1,720
D) $1,813
E) $2,000

Question

Quizplus · Accepted Answer

The reasonable cash offer would be the present value of $2,000 due in 8 months at Ace's cost of debt, which is 14% annually. To find the present value, we use the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($2,000), r is the monthly interest rate (14% annually or 14/12 per month), and n is the number of periods (8 months). This calculation gives us a present value of approximately $1,829, making option B the correct choice.

Ace Furniture Will Give You 8 Months, Interest Free, Before