Extended Warranty. Chris is renting a house, and it does not have a refrigerator. A refrigerator is worth $2 every day because Chris will eat out less. Chris has a discount rate of 20 percent. Refrigerators usually last five years

1. How much is Chris willing to spend on a refrigerator?

2. Lowe’s is offering a financing deal with 10 percent down payment and six years of payments every year of payments equals 20 percent of the purchase price. At these terms, how much is Chris willing to spend on the fridge.

3. Chris buys a $1000 refrigerator on the finance plan. The refrigerator has a 3 year warranty. Chris can buy a three year extension of the warranty (making it a six year warranty) for $600. Suppose the refrigerator will break when it is exactly five years old, and will not be repairable. The warranty will replace the broken refrigerator with a new unit. Should Chris buy the warranty? Suppose the same Lowe’s financing deal will be available in five years.