You are going to use your knowledge of present value to

determine the costs of using store financing vs introductory credit card offers. You can choose which of

the following purchases you would like to make and read the applicable finance terms and conditions

posted on D2L. Assume that you are making these decisions in the first few months of your full time

employment after college. For both options, you are required to pay 7% sales tax. Assume that you

have $1,200 saved in your saving account. Your saving account pays you 2% interest. Assume the

market interest rate is currently 6%. Even though the financing compounds more frequently, in this

assignment, assume the charges are compounded annually.

Purchase options:

Television and home theater: You have decided to upgrade your entertainment

system to include a 50 3D-LED-Smart TV for $1,800, a Blu-ray home theater

system for $400, and assorted mounting and cables for $250. The credit terms

posted for Best Buy apply to this purchase. For store financing, assume 12

months no interest. Suppose the current discount is 8% for purchases made

using their card.

Option 1: Store financing special

Read the store financing option for the store that you have chosen above. Note that

interest starts accruing from the date of purchase. If you have not paid the entire

balance, the full interest is charged to you. Before you make the decision, you should

know the costs and benefits. Calculate the amount of interest charge you will accrue if

you do not pay off the balance within the offer period. Discount that figure to calculate

the interest charge in present value terms. If you take the store financing, you can leave

your $1,200 in the saving account for the offer period and earn interest. How much

interest will you earn? What is the present value of your saving account balance at the

end of the offer period? Calculate the net cost to you in present value terms if you pay

off the balance before the offer period ends (PV cost PV of savings).

Option 2: Store Credit Cards

Review the credit card terms from the store you chose. Lets assume the interest is

compounded annually at the beginning of the year for ease of calculation. (In real life,

its compounded either daily or monthly.) At the store, you would put the entire balance

(minus the discount) on the new credit card. Credit cards do not have a 12 month grace

period so you cannot avoid the interest on the credit card. You can use the $1,200 in

your saving account to make a payment immediately and reduce the credit card balance,

or you can leave the savings at the bank and earn interest for either one or two more

years. Which would you choose to do? Calculate the first years interest charges using

the credit card rate and your total balance. Think of this as the ceiling on the amount

you would likely pay. Note: you should use your answer from above about whether to

make the initial payment of $1,000 to reduce the balance on which interest is calculated.

After calculating the costs under options 1 and 2, write up a summary of your findings. Include

the calculations you made. Make sure to tell me which option you would choose for financing.

credit card: no interest if paid in full in 12 months

How We Will Calculate Your Balance:

We use a method called daily balance.

*The store sales associate or store website will identify which purchases are eligible for the reduced rate credit plan.

The information about the costs of the card described in this application is accurate as of April 30, 2013.

This information may have changed after that date. To find out what may have changed, write to us at

Citibank, N.A., P.O. Box 6403, Sioux Falls, SD 57117.

The above variable APRs were in effect in the last 90 days. If the APRs have changed due to

changes in the Prime Rate, you will be provided the APRs and daily periodic rates that were in

effect in the last 30 days in the Account Terms Printout.

New York residents may contact the New York State Banking Department to obtain a comparative listing

of credit card rates, fees and grace periods by calling 1-877-226-5697.

MY BEST BUY

CREDIT CARD PREFERRED

and

MY BEST BUY

CREDIT CARD

Interest Rates and Interest Charges

Annual Percentage Rate

(APR) for Purchases

25

.24% or 27.99%

based upon your creditworthiness.

These APRs will vary with the market based on the Prime Rate.

11.90%

for select purchases eligible for the 48 month reduced rate

credit plan.*

How to Avoid Paying

Interest on Purchases

Your due date is at least 25 days after the close of each billing cycle.

We will not charge you any interest on purchases if you pay your entire

balance by the due date each month.

Minimum Interest Charge

If you are charged interest, the charge will be no less than $2.

For Credit Card Tips from

the Consumer Financial

Protection Bureau

To learn more about factors to consider when applying for or using a

credit card, visit the website of the Consumer Financial Protection

Bureau at

http://www.consumerfinance.gov/learnmore

Fees

Penalty Fees

Late Payment

Returned Payment

Up to

$35.

Up to

$25.