Question

You are shopping for a TV, and three stores carry the same model for $300 each. Each store charges 18% interest per annum, has a 30 day grace period, and sends out their bills on the first of the month. Each store calculates the finance charge using different methods: Store A Average daily balance method Store B Adjusted balance method Store C Previous balance method Assume you bought the TV on May 5, and made one payment of $100 on June 15. What is the cost of financing with Store A for the month of June?

Answer 1

Sol:

TV cost = $300

Interest rate = 18% p.a, Monthly = 18%/12 = 1.5%

Payment made = $100 on June 15

To determine cost of financing with Store A for the month of June using Average daily balance method:

Balance due till June 15th (Beginning balance) = $300

Balance due after the payment of $100 made (Closing balance) = $300 - $100 = $200

Average balance = (Beginning balance + Closing balance) / 2

Average balance = (300 + 200) / 2 = $250

Financing cost = Average balance x Monthly interest rate

Financing cost = 250 x 1.5%

Cost of financing = 250 x 0.015 = $3.75

Therefore cost of financing with Store A for the month of June using Average daily balance method is $3.75.