Problem
Part I
The Low Rate Credit Card is a no annual fee card with an interest rate of 6.99% per annum calculated daily on purchases and cash advances, but with up to 108 days interest free on purchases if you pay the full balance off each month.
Task
Calculate how much interest charge you are avoiding if you buy $3,000 of purchases at the start of the cycle and pay the full amount when due 108 days later (show all workings).
Part II
Suppose Salford City FC convinces a former player named Paul Scholes to come out of retirement and play for three seasons. The team offers the player $2.5 million in year 1, $3 million in year 2, and $4 million in year 3. To sweeten the deal Salford City FC also offers a signing bonus of $500,000 payable at the beginning year.
Task
Assuming end-of-year salary payments, how do you find the value of the player's contract today if the player has a discount rate of 7%?