Question 23 • 26-27 Ignite Technical Math-Financial Math - MA2007
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 doesn’t have $1,200 and Tom does not accept credit cards, they both think a cash advance might be a good idea. Julian’s 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?
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.
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
At 26% simple interest for 24 months (2 years), the interest on $1,200 would be $1,200 × 0.26 × 2 = $624. That makes the motorcycle cost $1,824 in total, which is more than the $1,800 dealership price. So Julian should not use the cash advance; choice A says he would pay too much in interest to justify it.
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