Question

You have been pricing an MP3 player in several stores. Three stores have the identical price of $400. Each store charges 18 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the MP3 player on May 5 and made a $100 payment on June 15. What will the finance charge for June be if you made your purchase from store A? From store B? From store C? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Finance Charge Store A Store B Store C

Answer 1

Store A:
Average daily balance:
= ($400 + $300) / 2 = $700 / 2 = $350
Finance charge = ((Beginning balance + Ending balance) / 2) * (Annual interest rate / 12)
= (($400 + $300) / 2) * 18% / 12
= $350 * 18% / 12
= $63 / 12
= $5.25

Store B:
Adjusted balance method:

Finance charge =(Beginning balance - Payments) × (Annual interest rate / 12)
= ($400 - $100) * (18%/12)
= $300 * 18% / 12
= $54 / 12
= $4.50

Store C:
Previous balance method:

Finance charge = Beginning balance × (Annual interest rate / 12)
= $400 * 18% / 12
= $72 / 12
= $6