Show all work. Label and clearly explain your answer. This is very important. 1) You must explain how you arrived at your answer in order to get full credit. 2) If you do show your work, and your answer is wrong, you can still earn a substantial amount of credit depending on how serious the error is. 3) If your answer is wrong, and you don't show your work, you will get a zero.
Jenny’s Flying Rugs and Carpets Consortium has advertised that they are offering reduced financing on their new Flying Knot model. The Flying Knot costs $29,999.99, and the financing offer is 1% annual rate, compounded monthly (.01/12 = 0.00083 per month) if you finance the rug for 5 years using monthly installment payments.
The special financing rate, of course, is only available to customers who buy the Flying Knot. The market interest rate for carpet loans, available at numerous banks is 5% annual rate, compounded monthly (.05/12 = 0.004167 per month).
Using the special financing rate, what would be your monthly payments if you purchased a new Flying Knot?
Special financing in this case can be interpreted as offering to sell the rug at a discounted price to non-cash buyers. What is the amount of the discount on a per month basis?
What is the amount of the discount in terms of the sale price?
HINT: The discount in terms of the sale price will equal the present value of the per month discount.