Score: 0 of 1 pt 2 of 7 (1 complete) HW Score: 0%, 0 of 7 pts Problem P7-2 (simi

Question

Score: 0 of 1 pt 2 of 7 (1 complete) HW Score: 0%, 0 of 7 pts Problem P7-2 (similar to) Question Help Shirley, a recent college graduate, excitedly described to her older sister the $1,710 sofa, table, and chairs she found today. However, when asked she could not tell her sister which interest calculation method was to be used on her credit-based purchase. Calculate the monthly payments and total cost for a bank loan assuming a one-year repayment period and 14.25 percent interest. Now assume the store uses the add-on method of interest calculation. Calculate the monthly payment and total cost with a one-year repayment period and 12.25 percent interest. Explain why the bank payment and total cost are lower even though the stated interest rate is higher. Click on the table icon to view the MLPF table The monthly payment for a bank loan assuming one-year repayment period and 14.25 percent interest is S 153.7. (Round to the nearest cent.) The total cost for a bank loan assuming one-year repayment period and 14.25 percent interest is S 1844.8. (Round to the nearest cent.) f the store uses the add-on method of interest calculation, the monthly payment with a one-year repayment period and 12.25 percent interest is s(Round to the nearest cent)

Explanation / Answer

In addon method, interest is computed at the beginning of the loan and added to the loan. This total amount is divided by the number of payments to arrive at monthly payment

Interest=1710*12.25%=209.475
Hence, total loan=1710+209.475=1919.475
Monthly payments=1919.475/12=159.95625

In case of add on interest, loan becomes higher hence payment is higher even when interest rate is lower compared to earlier 14.25%.

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