Dorothy lacks cash to pay for a $720 dishwasher. She could buy it from the store

Question

Dorothy lacks cash to pay for a $720 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $65. The total cost would then be $780. Instead, Dorothy decides to deposit $60 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved $770.40—$720 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs $849.60. Its price has gone up 18 percent, the current rate of inflation. From the financial standpoint, was postponing her purchase a good trade-off for Dorothy?

Explanation / Answer

The price has gone up 18 % due to inflation, hence people prefer cash now instead of more cash in future.Value of money now is more than same amount in future, inflation erodes tye buying power of money.

She could have taken the loan with monthly payments of 65, as it would add up to 780 which is wsy less than849.60.Postponing hervpurchase is not a good trade off, the prices will cintinue to increase in future at the rate of inflation.

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