Question

Dorothy lacks cash to pay for a $960 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $85. The total cost would then be $1,020. Instead, Dorothy decides to deposit $80 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved $1,027.20—$960 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs $1,113.60. Its price has gone up 16 percent, the current rate of inflation. From the financial standpoint, was postponing her purchase a good trade-off for Dorothy? Question 8 options: No Yes

Answer 1

Answer: No

Before going into the decision of postponing purchase, the following two steps should be taken:

Step 1) The amount of bank interest should be searched.

Step 2) This is to be compared to the inflation (at 16% rate) and if the bank interest is lower than the inflation amount, the purchase should be postponed.

Amount of bank interest = Saved – Deposit = 1027.20 – 960 = $67.20

Amount of inflation = 1113.60 – 960 = $153.60

Since inflation is greater than interest, postponing is not good; it should be purchased at once in order to prevent the price increasing more in future.