In: Finance
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?
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.