You are the financial manager at Best Buy where a certain TV set is normally sold for $2,500 and the full purchase price is financed for 30 monthly payments at 24% per year compounded monthly, with the payments made at the end of each month. During Christmas Best Buy is planning to run a zero-interest financing sale during which you will offer the customers to finance the TV set over 30 months at 0% interest. How much do you need to charge for the TV set during the Christmas sale in order to earn your usual combined return on the sale and the financing?

Question

How would I do this question? thanks

Answer 1

3349

Answer 2

Facts:
PV= $2,500
APR= 24%
30 months payment
compounded monthly (every 12 months)

Step 1- Find EPR:

(1+APR/m)^m = (1+EPR)^f
(1+0.24/12)^12 = (1+EPR)^12
(1.268241795) = (1+EPR)^12
(1.268241795)^(1/12) = (1+EPR)
(1.02-1)= EPR
0.02= EPR

Step 2 - Find the PMT

PV= PMT (1 - (1/(1+EPR)^t))/EPR
2500 = PMT (1 - (1/1.02)^30))/0.02
2500/22.39565 = PMT
PMT = 111.63

Step 3 -
Customers pay $2500 so without interest they should be paying 2500/30 = 83.33

However they pay 111.63 every month which is 111.63-83.33= $28.3 of interest every month

So in 30 months total interest payed is $28.3*30= $849

Therefore if the manager wants to get the same amount of money but with 0% of interest he would have to charge $849+$2,500= $3,349