Question

You have just decided to buy a sofa for 17,000,000Tshs. At the store the sales person offers you to divide your payment over 12 months without interest . You will pay 17,000,000/12 per month starting next month plus an administrative fee of 35,000 Tshs per month to be added to your monthly bill. If your alternative is to use your credit card with an APR of 12% how much do you pay for sofa? (Hint: calculate the present value of the offer and compare it paying 17,000,000 upfront today.

Answer 1

		PAYMENT IN 12 INSTALLMENTS
	A	Cost of Sofa	17,000,000	Tshs
	B=A/12	Payment of monthly installment	1,416,667	Tshs
	C	Administrative fees per month	35,000	Tshs
	Pmt=B+C	Monthly total payment	1,451,667	Tshs
	Nper	Number of months of payment	12
	Rate	Discount Rate=Monthly interest=(12/12)%	1%
	PV	Present Value of total payments	16,338,621	Tshs	(Using PV function of excel with Rate=1%, Nper=12,Pmt=-1451667,)
		Amount paid for sofa=	16,338,621	Tshs