Question

In: Finance

You can purchase an appliance (refrigerator, furnaces, A/C, etc.) maintenance contract. You can pay $1,000 today...

You can purchase an appliance (refrigerator, furnaces, A/C, etc.) maintenance contract. You can pay $1,000 today for a year's maintenance coverage or pay $90 per month, each month, starting today, for 12 months. If your investments earn 5.00% APR (compounded monthly), how much would you save or would it cost you (in present value terms) to pay on a monthly basis?

Solutions

Expert Solution

PV of $90 payments P+P×[1-(1÷(1+r))^(n-1)]÷r
Here,
1 Interest rate per annum 5.00%
2 Number of years                                                                                1
3 Number of compoundings per per annum                                                                             12
4 = 1÷3 Interest rate per period ( r) 0.42%
5 = 2×3 Number of periods (n) 12
Payment per period (P) $                                                                         90
PV of $90 payments $                                             1,056
90+90*(1-(1/(1+0.42%))^(12-1))/0.42%

Making monthly payments will cost $56.


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