Question

Can someone show me how to do this question please?

Jackson purchased some power tools totaling $1,543 using a six month deferred payment plan with an interest rate of 23.76%. He did not make any payments during the deferment period. What will the total cost of the power tools set be if he must pay off the power tools within two years after the deferment period?

Answer 1

I can help you

Answer 2

oh thank you!!

Answer 3

First do you know what the time period is for the interest rate 23.76%,,,it is usually assumed to be a specific perios of time...

Answer 4

i have no idea

Answer 5

It is usually on a yearly basis...that is very important.

Answer 6

well it says on a six month deferred plan

Answer 7

agreed, but generally when stores, banks or credit card companies quote interest rates it is on a yearly basis

Answer 8

okay so what do i have to do?

Answer 9

Well if I borrow $1543 dollars, after one year how much interest will I owe?

Answer 10

assuming the yearly rate is 23.76%...

Answer 11

so wouldn't it be 23.76

Answer 12

since thats the yearly rate and you're borrowing that much after a year?

Answer 13

no it would be $1543(.2376) =

Answer 14

oh okay so it would be 366.62

Answer 15

that's rounded

Answer 16

yes. so that is the interest that you owe after one year.
Now at the beginning of the second year , what is the total amount of money you owe?

Answer 17

sorry i'm confused i have no idea

Answer 18

That is ok...
At the end of the first year (which is the beginning of the second year) you owe the
principal (what you borrowed) + the interest accumulated during the first year
Can you calculate that please...

Answer 19

so i would do what i borrowed which was 1,543 dollars added to the interest accumulated during the first year which was 366.62 right?

Answer 20

or am i completely off track?

Answer 21

no you are correct!

Answer 22

okay great so it would be 1,543+(366.63)=1,909.63

Answer 23

Super!....now for the second year they are going to charge you 23.76% interest on this amount ...so how much interest will you owe at the end of the second year?

Answer 24

so 1,909.63(.2376)= 453.73 (rounded answer)

Answer 25

great...so what is the total amount of money now that you must repay after the two years?

Answer 26

i would add 453.73+366.62 which is 820.35 right?

Answer 27

and you would add the principal to that as well

Answer 28

which is?

Answer 29

the principal is the original amount you borrowed to buy the tools

Answer 30

Oh yeah!! i just remembered. so 1,543+820.35=2,363.35

Answer 31

great ...now one very important point...
I assumed what is called compounding interest to solve this problem (that is you paid interest on the interest)....This is how is usually works in the real world.
There is another way to do it which assumes simple interest.
Look these ideas up because it we assume simple interest the total you pay is less than
if we use compounding interest.
http://www.basic-mathematics.com/simple-vs-compound-interest.html

Answer 32

Have a great day!!

Answer 33

so is 2,363.35 my final answer?

Answer 34

@surry99

Answer 35

yes that is correct assuming compounding interest