Question

Comparing Costs of Credit Using Three Calculation Methods. You have been pricing a compact disk player in several stores. Three stores have the identical price of $300. Each store charges 18 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the disk player on May 5 and made a $100 payment on June 15. What will the finance charge be if you made your purchase from store A? From store B? From store C? (Obj. 2)

Answer 1

Answer:

Store A finance charge = $140.625

Store B finance charge = $90

Store C finance charge = $202.5

Explanation:

Store A

Average daily balance                            Finance Charge

(300*200)/2 = $250                              3.75(250*0.15) = $140.625

Store B

Adjusted balance method

(300-100) = $200                                    3.00*(200*0.15) = $90

Store C

Previous balance method      

300 - 0 = $300                                        4.50(300*0.15) = $202.5

Answer 2

Answer:

Store A = 3.4521

Store B = 2.9589

Store C =  4.4384

Explanation:

Store A charges ADB method

purchase made on 5th first payment on 15th of 100

so from 5th to 15th Average daily balance =300 for 10 days

then from 15th to 4th for remaining 20 days average daily balance = 200

Average Daily Balance = (300*10+200*20)/30

Total finance charge = ADB*(APR*(Days/365))

=300*((0.18)*(10/365))+200*((0.18)*(20/365))

= 1.4795+1.9726=3.4521

Store B

Adjusted Balance Method uses adjusted balance to calculate the charges

Adjusted balance=Starting balance adjusted for credit and debit

Adjusted balance =300-100=200

Financial Charges = 200*(.18*(30/365))=2.9589

Store C

Previous Balance Method the interest is calculated on amount of balance carried from previous billing cycle

Balance Carried = 300

Charges =300*(.18*(30/365))= 4.4384