About real rate of interest that customer is being charged

Assignment Help Financial Management

Reference no: EM132018937

Show Calculation

A customer is considering taking out a loan to purchase a piece of furniture. The store manager will offer as “a special favor” a loan to the customer for the purchase of the furniture. The terms of the loan are as follows: the rate will be 10% per year, and because the desk costs $600, the interest will come to $60 for the one-year loan. Thus, the total price is $660, and the customer can pay it off in 12 instalments of $55 each.

a) Using the interest rate of 10% per year, calculate the net present value of the loan – be sure you convert the interest rate to a monthly percentage. Based on this value, should the customer accept the terms of the loan?

b) This time, look at the loan from the store manager’s perspective. Again using an interest rate of 10% per year, what is the net present value of the loan from the store manager’sperspective?

c) If we instead assume an interest rate of 18%, keeping the payments at $55 per month, what is the net present value of the loan to the manager? What does this imply about the real rate of interest that the customer is being charged?

Show Calcuations

Reference no: EM132018937

Questions Cloud

Using the diffusion of innovation theory : Using the diffusion of innovation theory, what factors contributed to the rapid adoption and success of Amazon.com?

Find the most recent annual financial statements : Find the most recent annual financial statements for Coca Cola and do the following calculations.

Consumption associated with defaulting and repaying : Write down expressions for the levels of consumption associated with defaulting and repaying, respectively.

What price do you need to pay if you were to buy bond today : It has been 75 days since the last coupon was paid. What price do you need to pay if you were to buy this bond today?

About real rate of interest that customer is being charged : A customer is considering taking out a loan to purchase a piece of furniture. What does this imply about real rate of interest that customer is being charged.

Transaction deposits on its balance sheet : BSW Bank currently has $900 million in transaction deposits on its balance sheet.

Mutually exclusive project-calculate npv for each project : Consider the following two mutually exclusive projects: Calculate the NPV for each project,

Incremental net present value of replacing current machine : Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine?

Maximize annual returns through equity investments : Consider a portfolio manger whose mission is "to maximize annual returns through equity investments in the single-family homebuilding industry."

User Account

All Pages