Steve wants to sell his scooter. There are two offers, one at Rs. 12,000 cash…

2023

Steve wants to sell his scooter. There are two offers, one at Rs. 12,000 cash and the other a credit of Rs. 12,880 to be paid after 8 months, money being at 18% per annum. Which is the better offer?

  1. A.

    ₹12000 cash

  2. B.

    ₹12880 credit

  3. C.

    Both are good

  4. D.

    None is good

Attempted by 2 students.

Show answer & explanation

Correct answer: A

Step-by-Step Solution

To determine which offer is better, we need to compare the present value of the future credit payment with the immediate cash offer.

  1. Calculate the interest rate for the given period:

    • Annual interest rate = 18%.

    • Period = 8 months = 8 / 12 years = 2 / 3 years.

    • Interest rate for 8 months = (18 / 100) * (2 / 3) = 0.12 or 12%.

  2. Calculate the present value of the credit offer:

    • The amount to be paid after 8 months is Rs. 12,880. This amount includes the principal and the interest for that period.

    • Let the present value be P.

    • Amount = P * (1 + (Rate * Time))

    • 12,880 = P * (1 + 0.12)

    • 12,880 = P * 1.12

    • P = 12,880 / 1.12

    • P = 11,500.

  3. Compare the offers:

    • Present value of the credit offer = Rs. 11,500.

    • Immediate cash offer = Rs. 12,000.

    • Since Rs. 12,000 is greater than Rs. 11,500, the cash offer is better.

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