eek 3 Homework 3 Tenisha Foy: Attempt 1 Question 8 (2 points) Dorothy lacks cash

Question

eek 3 Homework 3 Tenisha Foy: Attempt 1 Question 8 (2 points) Dorothy lacks cash to pay for a $660 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $60. The total cost would then be $720. Instead, Dorothy decides to deposit $55 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved $706.20-660 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs $778.80. Its price has gone up 1 8 percent, the current rate of inflation. From the financial standpoint, was postponing her purchase a good trade- off for Dorothy? You may

Explanation / Answer

No saving the money was not a good option because price of the dishwater increased by the 18% due to inflation and return she gets on the saving account was not that much it was 14.66% which is less than inflation, so it was not the good decision to postpone her purchase.

we can find the interest rate on saving account using FV of annuity formula

FV of annuity = P * (1 - (1+r)^n)/r

706.2 = 55 * (1 - (1+r)^12)/r

while solving for the equation using trail and error we get

r = 1.222%

yearly interest rate = 1.222* 12 = 14.66%

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