Question

If a mechanic uses his credit card to pay for a compressor that costs $477.95 and does not pay on it until the second month, what will the 1.5% monthly interest charge be at the end of the first month?
A. $7.17

B. $12.83

C. $15.43

D. $22.06

Answer 1

Answer:

A. $7.17

Step-by-step explanation:

We have been given that a mechanic uses his credit card to pay for a compressor that costs $477.95 and does not pay on it until the second month.

We will use compound interest formula to solve our given problem.

$A=P(1+\frac{r}{n})^{nT}$ where,

A = Final amount after T years,

P = Principal amount,

r = Annual interest rate in decimal form,

n = Periods of compounding,

T = Time in years.

Let us multiply our given rate by 12 to get APR and convert it in decimal form.

$APR=12\times 1.5\%$

$APR=18\%$

$18\%=\frac{18}{100}=0.18$

Since 1 year equals 12 months, so 1 month will be 1/12 year.  

Upon substituting our given values in above formula we will get,

$A=477.95(1+\frac{0.18}{12})^{12\times\frac{1}{12}}$

$A=477.95(1+0.015)^{1}$

$A=477.95(1.015)$

$A=485.11925$

Now let us subtract principal amount from the final amount to get the monthly interest charge at the end of 1st month.

$\text{The monthly interest charge be at the end of the first month}=485.11925-477.95$

$\text{The monthly interest charge be at the end of the first month}=7.16925\approx 7.17$

Therefore, the monthly interest charge be at the end of the first month will be $7.17 and option A is the correct choice.