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 doesnt have $1,200 and tom does not accept credit cards, they both think a cash advance might be a good idea. julians 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.

Explanation:

Calculate the monthly payment

Using the Amortized Payment Calculation knowledge point

$$ M = P \frac{r(1+r)^n}{(1+r)^n - 1} $$

$$
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$$

Calculate the total cost of the cash advance

Using the Total Cost of Credit and Cash Advance Interest knowledge points

$$
LATEXBLOCK1
$$

Compare total cost with dealership price

Using the Total Cost of Credit knowledge point

$$
LATEXBLOCK2
$$

Answer:

• 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. (Correct answer)
• 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.