Question

Determine the equivalent cash price of an item that can be purchased for $3350 down, and...

Determine the equivalent cash price of an item that can be purchased for $3350 down, and $3605 paid at the end of each year for 3 years if money is worth 9.135% simple interest.

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Answer #1

Sol:

Down payment = $3350

Annual payment (PMT) = $3605

Period (n) = 3 years

Simple interest rate (r) = 9.135%

To Determine the equivalent cash price of the item:

An equivalent cash price of a item is the amount of the down payment plus the value of all future, fixed-amount payments plus interest. Down payment is a part of the present value. You don't calculate interest on it because it's money that you already have in hand. Equivalent cash price compare the cost of an all-cash purchase with the same product paid for over time.

Present value (PV) = Down payment + (PMT x n) x (1 + r)

PV = 3350 + (3605 x 3) x (1 + 9.135%)

PV = 3350 + (10815 x 1.09135)

PV = 3350 + 11802.95

PV = $15,152.95

Therefore equivalent cash price of the item will be $15,152.95

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