State University tuition and fees can be paid using one of two plans. Early-bird: Pay total amount due one year in advance and get a 10% discount. On-time: Pay total amount due when classes start.
If the cost of tuition and fees is $20,000 per year, (a) how much is paid in the early-bird plan, and (b) at an interest rate of 6% per year, what is the equivalent amount of the savings compared to paying when classes start, that is, 1 year later than the early-bird plan?
(a) Early-bird: 20,000 – 20,000(0.10) = $18,000
(b) Equivalent future amount = 18,000(1 + 0.06)
= $19,080
Savings = 20,000 - $19,080
= $920
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