You are purchasing a lawnmower and the salesperson is trying to convince you to buy an extended warranty for 4 years.  The cost of the warranty today is $500.  To try to convince you more to buy the warranty, the salesperson offers you a credit of $100 at the end of the two years if you don’t require any services and therefore don’t use the warranty.  Assuming that you will be able to use the credit towards annual maintenance starting in the third year of owning the lawnmower answer the following questions: a) What is the value to you today of the promised credit from the supplier. Assume an interest rate of 6% per year.     b) Given your answer in a) above, what is the net cost of the extended warranty?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You are purchasing a lawnmower and the salesperson is trying to convince you to buy an extended warranty for 4 years.  The cost of the warranty today is $500.  To try to convince you more to buy the warranty, the salesperson offers you a credit of $100 at the end of the two years if you don’t require any services and therefore don’t use the warranty.  Assuming that you will be able to use the credit towards annual maintenance starting in the third year of owning the lawnmower answer the following questions:

a) What is the value to you today of the promised credit from the supplier. Assume an interest rate of 6% per year.

 

 

b) Given your answer in a) above, what is the net cost of the extended warranty?

 

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