Extended Warranty. Ted is renting a house, and it does not have a refrigerator. A refrigerator is worth $2.75 every day because Ted will eat out less. Ted has a discount rate of 17%. Refrigerators usually last 6 years.
A) How much is Ted willing to spend on a refrigerator?
B) Lowe’s is offering a financing deal with 15% downpayment and 3 years of payments, such that every year of payments equals 30% of the purchase price. At these terms, how much is Ted willing to spend on the fridge.
C) Ted buys a $2500 refrigerator on the finance plan. The refrigerator has a 3 year warranty. Ted can buy a 4 year extension of the warranty (making it a 7 year warranty) for $1000. Assume the refrigerator will break when it is exactly six years old, and will not be repairable. The warranty will replace the broken refrigerator with a new unit. Should Ted buy the warranty? Assume the same Lowe’s financing deal will be available in 6 years, should Ted want to purchase a replacement refrigerator.