John Dean is trying to buy a new Ford pickup and has been negotiating with two dealerships on identical trucks with sticker prices of $42,200. The first dealer is offering to finance the truck at 0 percent interest for the next 36 months. The second dealer has offered to sell John the truck for $36,000 and will finance the price with a bank loan over the next 36 months at a 12 percent annual rate of interest.
Which of the two deals is better for John if 12 percent is the going truck loan interest rate?
Why would the first dealer be willing to loan money at 0 percent interest?
Jill Walters, your boss at Walters’s Waterbeds & Futons, has seen the zero percent interest advertising of other furniture stores and wants to use this promotion to attract new customers. Currently, her cost to buy a futon is $200 and she is selling them for $550. She is also charging 18 percent interest for customers who buy on credit. Jill wants to offer 24 months’ interest-free financing.
What price must she charge if she wants to maintain her current profit margin and still make 18 percent interest?
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