You want to buy a 285 litre refrigerator for Rs 10,000 on an instalment basis. A distributor is prepared to sell the refrigerator on instalments. He states that the payments will be made in four years, interest rate being 12 per cent. The annual payments will be as follows:
Four year of interest at 12%, i.e., Rs 10,000 ´ 0.12 ´ 4 4,800
Annual payments (Rs 14,800 ¸ 4) 3,700
What rate of return is the distributor earning? If your opportunity cost of capital is 14 per cent will you accept the offer? Why?