Extended Warranty. Chris is renting a house, and it does not have a refrigerator

Question

Extended Warranty. Chris is renting a house, and it does not have a refrigerator. A refrigerator is worth $2 every day because Chris will eat out less. Chris has a discount rate of 20%. Refrigerators usually last 5 years. How much is Chris willing to spend on a refrigerator? Lowe's is offering a financing deal with 10% downpayment and 6 years of payments every year of payments equals 20% of the purchase price. At these terms, how much is Chris willing to spend on the fridge. Chris buys a $1000 refrigerator on the finance plan. The refrigerator has a 3 year warranty. Chris can buy a 3 year extension of the warranty (making it an 6 year warranty) for $600. Assume the refrigerator will break when it is exactly five years old, and will not be repairable. The warranty will replace the broken refrigerator with a new unit. Should Chris buy the warranty? Assume the same Lowe's financing deal will be available in 5 years.

Explanation / Answer

Answer :-

a.) Amount paid = $ 2 every day

  Amount paid = $ 2 * 365

= $ 730 every year

Discount rate = 20%

years = 5 years

Spend on Refrigerators = 730 * PVIFA at ( r, n )

= 730 * PVIFA at ( 20% , 5 )

= 730 * 2.991

= $ 2183

c.) Chris buy a refrigerator $ 1000 with 3 years warranty period. If chris can buy another warranty extension for 3 yeras, he will have to pay another $ 600. so total amount paid is $ 1600 & total warranty period is 6 years. If the refrigerators will break-down after 5 years and it will replace with new unit. So chris can buy extention of warranty period.

  

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