The dining room set costs $3,000, and Furniture R’Us offers a financing plan that would allow them to either (1) put 10% down and finance the balance at 4% annual interest over 24 months or (2) receive an immediate $200 cash rebate, thereby paying only $2,800 cash to buy the furniture.
Bob and Carol currently earn 5.2% annual interest on their savings.
(a). Calculate the cash down payment for the loan.
(b). Calculate the monthly payment on the available loan. (Hint: Treat the current loan as an annuity and solve for the monthly payment.)
(c). Calculate the initial cash outlay under the cash purchase option.
(d). Assuming that they can earn a simple interest rate of 5.2% on savings, what will Bob and Carol give up (opportunity cost) over the 2 years if they pay cash?