Bài giảng môn học Quản trị kinh doanh - Chapter fourteen: Installment buying

INSTALLMENT BUYINGChapter FourteenCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin1. Calculate the amount financed, finance charge, and deferred payment. 2. Calculate the estimated APR by table lookup .3. Calculate the monthly payment by formula and by table lookup.LU 14-1: Cost of Installment BuyingLearning unit objectivesLU 14-2: Revolving Charge Credit Cards1. Calculate the finance charges on revolving charge credit card accounts.Finance charge (FC) –the interest charge.FC = Total of all -- Amount monthly payments financedInstallment loan – A loan paid off in a series of equal periodic payments. Payments include interest and principal.Amount financed (AF) – the amount actually borrowed.AF = Cash price -- Down paymentDeferred payment price (DPP) – the total of all monthly payments plus the down payment.DPP = Total of all + Down monthly payments paymentCost of Installment BuyingCost of Installment BuyingMary Wilson would like to buy a boat that cost $9,345. If she puts down $300 she can finance the balance for 60 months at 10.5% (monthly payment = $194.38). Calculate the amount financed, finance charge, and deferred payment price. Amount financed = Cash price -- Down payment Finance charge = Total of all -- Amount monthly payments financed Deferred payment Price = Total of all + Down monthly payments payments $9,045 = $9,345 -- $300 $2,617.80 = $11,662.80 -- $9,045 ($194.38 x 60) $11,962.80 = $11,662.80 + $300Calculating APR by TableStep 1. Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor.Step 2. Go to APR Table 14.1. At the left side of the table are listed the number of payments that will be made.Step 3. When you find the number of payments you are looking for, move to the right and look for the two numbers closest to the table lookup number. This will indicate the APR. Annual Percentage Rate (APR)Calculating APR rate by table Finance charge x $100 = Table 14.1Amount financed lookup number$2,617.80 x 100 = $28.94 $9,045Between 10.25% -- 10.50% Truth in Lending ActAPR must be accurate tothe nearest1/4 of 1%Annual Percentage Rate Table per $100 (Table 14.1)Calculating the Monthly Payment by Formula Finance charge + Amount financedNumber of payments of loanThe pickup truck advertisement below shows a $194.38 monthly payment. We can check this by formula and by table lookup.$2,617.80 + $9,04560 = $194.38Step 2. Look up the rate (10.5%) and the number of months (60). At the intersection is the table factor showing the monthly payment per $1,000 ($21.49).Step 3. Multiply the quotient in Step 1 by the factor in Step 2.9.045 x $21.49 = $194.38 Calculating the Monthly Payment by TableStep 1. Divide the loan amount by $1,000. $9,045 = 9.045 $1,000Loan Amortization Table (Table 14.2)(Monthly payment per $1,000 to pay principal and interest on installment loan) (Partial)Revolving charge account -- allows the buyer open-end credit up to the maximum credit limit.Fair Credit and Charge Card Disclosure Act of 1988.Revolving Charge Credit CardsInterest charges are based on the interest rate times the previous month’s balance (outstanding balance).Payments are first applied towards interest and then the outstanding balance (US Rule).Paying Just the Minimum, and Getting Nowhere FastBalanceTotal CostTotal Time$1,000$2,590.3517 years, 3 months$2,500$7,733.4930 years, 3 months$5,000$16,305.3440 years, 2 monthsThe cost – in years and dollars -- of paying the minimum 2% of balances on credit cards charging 17% annual interest:Source: www.bankrate.comSchedule of Payments(Table 14.3)Monthly Outstanding Amount of Payment Balance 1 1/2% Interest Monthly Reduction in OutstandingNumber Due Payment Payment Balance Due Balance Due 1 $8,000.00 $120.00 $500 $380.00 $7,620.00 (.015 x $8,000) ($500 - $120) ($8,000 - 380) 2 $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) 3 $7,234.30 $108.51 $500 $391.49 $6,842.81 (.015 x $7,234.30) ($500 - $108.51) ($7,234.30-391.49)Step 2. When the daily balance is the same for more than one day, multiply it by the number of days the daily balance remained the same or the number of days of the current balance.Step 3. Add the cumulative balances.Step 4. Divide the sum of the cumulative daily balances by the number of days in the billing cycle.Calculating Average Daily BalanceStep 5. Finance charge = Rate per month x Average daily balanceStep 1. Calculate the daily balance or amount owed at the end of each day during the billing cycle: Daily Previous Cash balance balance advances=++ Purchases -- Payments 31-day billing cycle8/20 Billing date Previous balance $2108/27 Payment $50cr.8/31 Charge Staples 309/5 Payment 10cr.9/10 Cash advance 60Calculating Average Daily BalanceRate 2% per month on average daily balance. Balance Monthly Reduction Balance Month due Interest payment in balance outstanding 1 $600 $15.00 $40 $25.00 $575.00 (.025 X $600) ($40 - $15)Calculate the balance outstanding at the end of month 2 (use U.S. Rule) given the following: purchased $600 desk; pay back $40 per month; and charge of 2 ½% interest on unpaid balance.2 $575 $14.38 $40 $25.62 $549.38 (.025 X $575) 31-day billing cycle8/20 Billing date Previous balance $2108/27 Payment $50cr.8/31 Charge Staples 309/5 Payment 10cr.9/10 Cash advance 60Calculating Average Daily BalanceRate 2% per month on average daily balance.1. Calculate the average daily balance and finance charge from the information that follows.Days Current Daily Balance Extension7 $210 $1,4704 160 ($210 -- $50) 6405 190 ($160 + $30) 9505 180 ($190 -- $10) 90010 240 ($180 + $60) 2,400 $6,360 Average daily balance = $6,360 = $205.16 31 Finance charge = $4.10 (205.16 x .02)Calculating Average Daily Balance31 - 21(7+4+5+5)