Natasha needs to purchase new sound equipment for her band, the Oscillots. The sound equipment costs , and as she does not have enough money to pay the full amount up front, she is considering two different methods of financing the purchase.
Option 1:
Natasha is eligible to receive a personal loan from her bank for the full amount of . It will be 5 a year loan at a nominal annual interest rate of 3.9% compounded monthly. Repayments are made each month.
Option 2:
The music shop from which Natasha is buying the sound equipment offers its own financing scheme. This scheme offers her a 5 year loan at a nominal annual interest rate of compounded quarterly. The terms of the loan require a 10% payment up front and quarterly repayments of .
State which option Natasha should choose. Justify your answer.
After considering her personal circumstances, Natasha chooses option 2. The music store invests the money from Natasha’s payments as soon as each payment is received.
If the music store invests Natasha’s payments in a fund yielding 0.9% interest per quarter and inflation is 1.2% per quarter, calculate the real amount of money that the music store has received by the end of the 5 year period.
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