Question 3 (Total of 22 marks)

For its "One-Year No-Interest Sale", Funky Town Furniture advertises that, on any purchase over $388 the customer's deposit needs to cover 10% of the list price. The balance of the purchase price is then paid in 12 equal monthly payments with no interest charges. Money is worth 9% per year compounded monthly to Funky Town because it can use any extra cash to pay down the balance on its operating loan on which interest is charged at 9% per year compounded monthly.

(a)(9 marks) What cash amount should Funky Town be willing to accept (instead of the no-interest plan) on an item ticketed at $5,000?

(b)(11 marks) Far Out Furniture offers the same no-interest plan but requires a 15% deposit and an establishment fee of $18 payable immediately. Far Out also charges an account keeping fee of $2.83 per month due with each payment. What cash amount should Far Out be willing to accept with its no-interest plan on an item ticketed at $5,000? Assume that for Far Out Furniture, money is worth 9.6% per year compounded monthly.

(c)(2 marks) Which shop offers a better deal for the customer? Explain.