Asked by Mr COMFORT MUNISI on Sep 22, 2024
Verified
Ace Furniture will give you 8 months, interest free, before you have to pay for a $2,000 sofa. Based on the fact that Ace pays 14% on its short term debt, what would be a reasonable amount of cash for you to offer them at the time of purchase?
A) $2,187
B) $1,829
C) $1,720
D) $1,813
E) $2,000
Interest Free
Describes a loan or credit arrangement that does not require the borrower to pay interest on the borrowed amount.
Short Term Debt
Refers to any financial obligation that is due for repayment within one year.
- Understand the principle of equal value across multiple time segments, in consideration of the interest rate.
Verified Answer
NM
Narandan Miller5 days ago
Final Answer :
B
Explanation :
The reasonable cash offer would be the present value of $2,000 due in 8 months at Ace's cost of debt, which is 14% annually. To find the present value, we use the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($2,000), r is the monthly interest rate (14% annually or 14/12 per month), and n is the number of periods (8 months). This calculation gives us a present value of approximately $1,829, making option B the correct choice.
Learning Objectives
- Understand the principle of equal value across multiple time segments, in consideration of the interest rate.