You have just started your first job and you want to have the basic appliances (
ID: 2620003 • Letter: Y
Question
You have just started your first job and you want to have the basic appliances (fridge, washer, dryer, etc.) in your apartment. You face the following choices: (i) Purchase all appliances at the store using a bank loan. There is no down payment as the bank can take your appliances if you default on the loan. The loan is at the annual market rate of 7%, and the loan amount is $6,600 to be repaid monthly over 4 years. (ii) Rent-to-buy from the same store. The monthly rental is $135 for 48 months and then you pay $900 to own all the appliances. What is the net cost today of the cheapest option?
Explanation / Answer
Net Cost of Option 1:
Interest for first year = 6600*7% = 462
Principal Repayment = 6600/4 = 1,650
Interest for 2nd year = 346.5
Principal Repayment = 1650
Interest for 3rd year = 231
Principal Repayment = 1650
Interest for 4th year = 115.5
Principal Repayment = 1650
Total Cost = $7,755
Option 2: 135*48 + 900 = $7,380
Therefore, Net cost today of cheapest Option = $7,380
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