Question

b. You bought a sachet water machine from Indie Inc. The cost of the machine was GH¢35,000. At that time, you asked for the payment to be deferred, and a contract was written. Under the contract, you could delay paying for the sachet water machine if you purchased the material for packaging the water from Indie Inc. You will then pay for the machine in a lump sum at the end of 2 years, with interest at a rate of 2% per quarter-year. According to the contract, if you ceased buying the packaging material from Indie Inc. at any time prior to 2 years, the full payment due at the end of 2 years would automatically become due. One year later, you decided to buy the packaging material elsewhere and stopped buying from Indie Inc., whereupon Indie Inc., per the contract terms, asked for the full payment that is due at the end of 2 years to be paid immediately. You were unhappy about this, so Indie Inc. offered as an alternative to accept the GH¢35,000 with interest at 10% per semiannual period for the 12 months that you had been buying the packaging material from Indie Inc. Which of the alternatives should you accept? Explain.

Answer 1

You should accept the original payment method because it is cheaper. Interests resulting from the original method are 5,824, while the interests charged using the alternative method are 7,000.

Step-by-step explanation:

alternative 1:

total principal of the loan = 35,000

yearly interest = 2% x 4 = 8%

future value of loan + interests in two years = 35,000 x (1 + 8%)² = 40,824

total interest = 5,824

alternative 2:

total principal of the loan = 35,000

yearly interest = 10% x 2 = 20%

future value of loan + interests in one years = 35,000 x (1 + 20%) = $42,000

total interest = 7,000