Question

Sam is getting ready for a big date when he realizes that he has no money. His roommate, Bill, also has no money, but he has a credit card. Knowing that nobody will let Sam use Bill’s credit card, Sam asks Bill to pull out a cash advance for $120.00. Bill agrees under the condition that Sam is responsible for all interest that accrues on the cash advance which is a 30% interest rate, compounded monthly. The $120 cash advance is repaid in monthly installments over 5 years. How much should Bill ask Sam to pay in interest for the cash advance?
a.
$3.88
b.
$112.80
c.
$120.00
d.
$232.80



Please select the best answer from the choices provided


A
B
C
D

Answer 1

B

Monthly rate = 0.30/12 = 0.025, n = 60. Monthly payment
A = 120*(0.025)/(1 - (1.025)^-60) ≈ $3.88.
Total paid = 3.88*60 = $232.80, so interest = 232.80 - 120 = $112.80.