Question

We have acquired new furniture for the office. The invoice for $6,000 offers two ways to pay: we can pay the entire amount by September 1, or we can pay $3,060 by September 1 and $3,000 by January 1. How does our decision depend on the interest rate at which we can invest our funds?

Answer 1

If we pay $3060 by September 1 and $3000 by Jan 1, then actually we are loosing (3060+3000-6000) or $60

After paying $3060 as remaining fund value= $(6000-3060)= $2940

To pay $3000 as we need interest amount (3000-2940)=$60 i.e. 60/2940=2.04% in 4 month or ((1+2.04)^3-1)=6.25% yearly interest rate

If the interest rate is more 6.25% then we actually get more than $3000 on Jan 1 on the invested capital of $2940.

So, If the interest rate is more than 6.25%,then go for scenario 2 (i.e. $3060 on Sep 1 and $3000 on Jan 1) and if the interest rate is less than 6.25% then go for $6000 on Sep 1.