Upon graduation from college, Kelly moved into an unfurnished apartment. Six months ago, she purchased the furniture for her new apartment at a downtown store. Harper's Furniture had a special sale. Retail prices were marked down 40 percent, and the store was financing new purchases at an add-on interest rate of 10 percent. Given that the APR on her credit card was 18 percent, she decided that Harper's financing was a better deal. Consequently, she purchased $6000 of furniture and financed it with a 12-month loan at and add-on interest rate of 10 percent. The contract indicated that upon early repayment there would be a partial return of the add-on interest. The amount of interest returned would be calculated using the rule of 78.


1. What was the APR on her consumer loan?Was Kelly correct?Was the store a better deal?

2. How much would Kelly need in order to pay off this loan at the end of the sixth month?

3. How much additional interest would would she have to pay if she held the loan for the entire 12-month period?

4. Kelly just recevied a 10,000 distribution from estate of her recently deceased grandmother. She is considering using part of the distribution to pay off the remaining balance on the furniture loan. If Kelly does not pay off the loan, she would place the funds in a CD that compound interest semiannually at a 5 percent annual rate. Which is the preferred alternative, paying off the loan or investing in the CD?(Note interest earned on the CD would be taxed at a 16 percent marginal tax rate, Interest paid on the loan is not tax deductible.)

Help me to understand this problem. I came up with answer like this

1.10%, yes, Yes the store was a better deal.

2.$7,700

3.550

4. I didn't understand please help me.

Quote:

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Originally Posted by kizzyb

4. Kelly just recevied a 10,000 distribution from estate of her recently deceased grandmother. She is considering using part of the distribution to pay off the remaining balance on the furniture loan. If Kelly does not pay off the loan, she would place the funds in a CD that compound interest semiannually at a 5 percent annual rate. Which is the preferred alternative, paying off the loan or investing in the CD?(Note interest earned on the CD would be taxed at a 16 percent marginal tax rate, Interest paid on the loan is not tax deductible.)

4. I didn't understand please help me.

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She is being charged 10% interest.

This is debt.

She should use her inheritance to pay off the debt.

Exception, if she can invest her inheritance and earn more than a 10% return.

In this case, she will earn around 10. Something %. While that is higher than the 10% on her debt, you also need to factor in taxes.

Since the tax rate is at 16%, overall, she will be earning less than a 10% rate of return on her investment of the $10,000. Therefore, it is in her best interest to pay off the debt with this money.