Dale saw that the campus bookstore is having a special on pads of computation pa

Question

Dale saw that the campus bookstore is having a special on pads of computation paper normally priced at $3 a pad, now on sale for $2.50 a pad. This sale is unusual and Dale assumes the paper will not be put on sale again. On the other hand, Dale expects that there will be no increase in the $3 regular price, even though the inflation rate is 2% every 3 months. Dale believes that competition in the paper industry will keep wholesale and retail prices constant. He uses a pad of computa- tion paper every 3 months. Dale considers 19.25% a suitable minimum attractive rate of return. Dale will buy one pad of paper for his immediate needs. How many extra pads of computation paper should he buy? (Answer: 4)

Explanation / Answer

Let Equivalent interest /3 months = x

Formula ieff = (1+x)n -1

0.1925 = (1+x)4-1 ( ieff = 0.1925 given, n=4 because inflation is given for every 3 months therefore, there will 4..like quarter.. (3 months in a year)

(1+x) = 1.19250.25

(1+x) = 1.045

x = 4.5%/3 months

When price is $3.00 , n=? , i=4.5 % , Price fall to $2.50

$2.50 = $3.00(P/F, 4.5%,n)

(P/F, 4.5%, n) = $2.50/ $3.00 =0.833

n is slightly greater than 4. So purchase pads of paper should he buy = 4.

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