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ANSWER TO CHECK OUT # 1
Let us take note of one observation. Since the appliance dealer can sell the same refrigerator with contract A or B and make a profit, then we can assume that he has an extra $1000.00 (of your money) to invest from his sale of the refrigerator with contract A.
If he invested the $1000.00 in a bank CD earning 6% per year, then the $1000.00 sum would grow in value to $3,310.20 in twenty (20) years when compounding monthly. At the end of twenty years he pays you $2000.00 and keeps $1,310.20.
However, we should realize that if he is smart enough to come up with this type of contract, then he would use a higher earning vehicle than bank CDís. If he used an average mutual fund that is earning a conservative 12% per year, then the $1000.00 sum would grow in value to 10,892.55 after twenty (20) years when compounding monthly.† At the end of twenty years he pays you $2000.00 and keeps $8,892.55. This is getting better for the appliance dealer. What do you think?
Let us assume that the appliance dealer is very knowledgeable about investing. Also realize that most banks are making 18% or more on credit cards used by consumers. So, let us assume that the appliance dealer uses an investment that earns 18%. After twenty (20) years the $1000.00 sum would grow in value to $35,632.82 when compounding monthly. He pays you $2000.00 and keeps the $33,632.82 for himself. Wow, this is getting better and better for the appliance dealer. Now, what do you think?
If you can afford to purchase that refrigerator for $2000.00 in contract A, then maybe you should consider contract B and invest the $1000.00 balance in a average mutual fund that earns an average 12% per year. After twenty (20) years you keep $10,892.55.
Given this additional knowledge and the realization that you can take control, which contract is best?
Clearly, you must follow through with any action you take.
YOU CAN ACCOMPLISH ANYTHING YOU SET OUT TO DO.
Now look at Check Out # 2 for a simply way to estimate the value of a lump sum of money in an investment earning a specific percent of interest for a specific period of time. Knowledge is Power.