A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
Correct Answer
C) $92,640
Monthly payment on $65,000 at 6% for 4 years = $1,527. Total payments = $1,527 × 48 = $73,296. Total cost = $20,000 down + $73,296 = $93,296 (closest to $92,640).
Why This Is the Correct Answer
Option C is correct because the total cost of Option B includes both the down payment and all monthly payments over the loan term. The monthly payment of $1,527 multiplied by 48 months equals $73,296 in total payments. Adding the $20,000 down payment gives $93,296, which is closest to answer choice C ($92,640).
Why the Other Options Are Wrong
Option A: $85,000
This is just the cash purchase price of Option A, not the total cost of Option B which includes financing charges
Option B: $87,640
This amount is too low and doesn't account for the full interest charges over the 4-year loan period
Option D: $95,000
This amount is too high and exceeds the actual calculated total cost including interest
Memory Technique
Remember 'DTP' - Down payment + Total Payments = Total cost of financing option
Reference Hint
Business and Finance chapter - Equipment financing and loan calculations section
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