A local furniture store is advertising a deal in which you buy a $3,500 dining r

Question

A local furniture store is advertising a deal in which you buy a $3,500 dining room set and do not need to pay for two years (no interest cost is incurred).

How much money would you have to deposit now in a savings account earning 6 percent APR, compounded monthly, to pay the $3,500 bill in two years? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

How much would you have to deposit in the savings account each month to be able to pay the bill? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

How much money would you have to deposit now in a savings account earning 6 percent APR, compounded monthly, to pay the $3,500 bill in two years? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

1) Future Value = $3500

Interest Rate = 6/12 =0.5% per month

Tenure = 2 years = 24 months

Present Value = 3500/(1 + 0.5%)24 = $3105.15

You would have to deposit $3105.15 now in a savings account to be able to pay the bill.

2) Future Value = $3500

Interest Rate = 6/12 =0.5% per month

Tenure = 2 years = 24 months

We are assuming payments are being made at the end of each month.

Annuity Payment can be found out using the PMT function of excel. The syntax for the same is: =PMT(0.5%,24,0,3500)

The value comes out to be $137.62

You would have to deposit $137.62 in the savings account each month to be able to pay the bill.

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