A furniture company is offering a choice of deals. You can receive $100 cash back on the purchase, or a 2 percent APR, 2-year loan. The price of the dining room set is $3,750 and you could obtain a 2-year loan from your credit union at 6 percent APR. What is the cost per month of each deal?

Question

Quizplus · Accepted Answer

For the cash back option, the cost is $3,750 - $100 = $3,650. Using a 6 percent APR loan from the credit union for 2 years, the monthly payment can be calculated using the formula for an installment loan: $PMT = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$, where P = principal ($3,650), r = monthly interest rate (6% annual rate / 12 months = 0.5% or 0.005), and n = total number of payments (2 years x 12 months = 24). Plugging in the values, the monthly payment is approximately $161.77. For the 2 percent APR option, the cost remains $3,750, and using the same formula with a 2% annual rate (2% / 12 months = 0.1667% or 0.001667), the monthly payment is approximately $159.53.

A Furniture Company Is Offering a Choice of Deals