You find an expensive piece of clothing you would like to buy while scrolling through Instagram. Using
Question:
You find an expensive piece of clothing you would like to buy while scrolling through Instagram. Using Instagram's product integration, you quickly find out that the price of this article of clothing is $240 a bit out of your normal price range. However, the website has an interesting offer that catches your eye: you can pay that $240 in $20 monthly installments over the course of an entire year (12 months).
What is especially interesting is that the offer has no interest and no additional fees:
1) You have a savings account that gives you guaranteed 2.4% interest APR (compounding monthly).Which option do you prefer between paying for this item with cash today or choosing to do the monthly payments? Ignore inflation for this short-term purchase. Hint: compare the present value of both options.
2) Now assume you don't have the cash to buy the clothing upfront but are still considering paying in monthly installments? Why might you not want to go forward with the monthly installments? How does this impact your budget (just describe which category it impacts and in which direction)?
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk