Question

Sally needs to have some drywall and insulation work done in her house. She has received a quote from a professional drywall contractor to complete her repairs for $1,200. Her neighbor Steve says he can complete the same job for $800. Sally could use a credit card to pay the contractor, but Steve can only accept cash. Sally’s credit card has a 14% APR for credit purchases and a 32% interest rate for cash advances. Expecting to pay $50 of the principle plus appropriate interest each month, Sally estimates that it would take her 24 months to pay off the contractor balance and 16 months to pay off the cash advance balance.

In the end, would it be cheaper for Sally to hire the contractor or her neighbor to complete the repairs?

A) Hiring the contractor for $1,200
B) Hiring her neighbor for $800 and paying in cash

Answer 1

Sally should hire her neighbor for $800 and pay in cash as it is cheaper than hiring the contractor for $1,200.

Step-by-step explanation:

To determine whether it is cheaper for Sally to hire the contractor or her neighbor, we need to compare the total cost of each option.

For the contractor, Sally will pay $1,200 over 24 months. To calculate the total cost, we need to consider the 14% annual interest rate. The monthly interest rate can be calculated by dividing the annual rate by 12: 14% / 12 = 1.16%. Each month, Sally will pay $50 towards the principal and interest. So, after the first month, the remaining balance will be $1,200 - $50 = $1,150. The interest for the next month can be calculated by multiplying the remaining balance by the monthly interest rate: $1,150 * 1.16% = $13.34. The monthly payment for the second month will be $50 + $13.34 = $63.34. This calculation can be repeated for each month until the balance reaches $0.

For her neighbor, Sally will pay $800 in cash upfront. Since there is no credit involved, there is no interest to consider. Therefore, the total cost for hiring her neighbor is $800.

Comparing the two options, it is cheaper for Sally to hire her neighbor for $800 and pay in cash.