Time Value of Money

Extra Credit

Situation: You buy a new high-end TV for $2,900 and pay for it with your credit card.  When the credit card bill comes at the end of the month, the credit card company says that the minimum payment is $50 and that you will pay 20% APR on any balance (that's 20% at an annual rate).  You decide that you will only pay the minimum amount each month.  Assume you require a rate of return of 6% on your investments.

1. What is the total amount you pay before the credit card charge is paid off?

2. What is the present value of the amount you end up paying?

3. Was it a good decision to buy the TV and finance it with the credit card?

What if the TV you want costs $3,100.  Answer 1-3 above for this case.  What do you notice?