Rina lacks cash to pay for a $860 dishwasher. She could buy it from the store on

Question

Rina lacks cash to pay for a $860 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $80. 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%u2014$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 Rina?

Explanation / Answer

the rate of deposit is low compared to the rate of inflation.

hence her decision to postpone was not good trade off.

the interest component in the savings of $1027.20 = 1027.2-960 = $67.2

the interest rate =67.2/860= 7.81%

Inflation rate is 16%

the purchase cost have been increased but her savings have not incresed in the same proportion of inflation rate

hence she has to face loss

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