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A man wants to sell his scooter. There are two offers, one at Rs. 12,000 cash and the other a credit of Rs. 12,880 to be paid after 8 months, money being at 18% per annum. Which is the better offer?

Correct answer: A. Rs. 12,000 in cash

  • A. Rs. 12,000 in cash
  • B. Rs. 12,880 at credit
  • C. Both are equally good
  • D. Rs. 18.33

Explanation

The present value of Rs. 12,880 due after 8 months is Rs. 12,880/(1 + 18% x 8/12) = Rs. 12,880/1.12 = Rs. 11,500. Since Rs. 12,000 cash is greater than Rs. 11,500 in present value, the cash offer is better. The likely trap is choosing Rs. 12,880 at credit because its stated amount is larger, without discounting it for the 8-month delay.

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