Question

Tom has offered to sell Julian his motorcycle for $1,200. Julian knows this is a very good deal, since the same motorcycle can be purchased at the dealership for $1,800. Since Julian doesn’t have $1,200 and Tom does not accept credit cards, they both think a cash advance might be a good idea. Julian’s credit card company can offer him a cash advance for the $1,200 he needs at an interest rate of 26%. He would then pay off the balance in 24 months. Should Julian use the cash advance to purchase the motorcycle? a. No. Julian would be paying too much in interest to warrant using a cash advance. b. Yes. Even with the interest, the total cost of the motorcycle would be less than at the dealership. c. Yes. The interest rate on the cash advance is low. Julian will not have to pay much interest on the cash advance. d. No. The high interest rate on the cash advance would make the purchase of the motorcycle almost twice than the price at the dealership

Answer 1

Answer:

Option A - No. Julian would be paying too much in interest to warrant using a cash advance.

Step-by-step explanation:

Lets say it is a simple interest.

p = 1200

r = 26%

t = 2 years

Simple interest formula is = $p\times r\times t$

So, SI = $1200\times0.26\times2=624$ dollars

Hence, amount after 2 years will be = $1200+624=1824$ dollars

So, you can see that with this criteria, Julian is paying extra than the dealer price.

Therefore, the correct answer is - No. Julian would be paying too much in interest to warrant using a cash advance.

Note- I have taken simple interest and you can see the difference. You can also check this with compound interest, the difference will be more. So, overall, the answer will be A in both cases.

Answer 2

P = 1200(1+(0.26/365))^(2*365)
P = 1200(1.681) = 2018.06

This is more than the dealer price so the best answer is A