A car dealer is offering to a buyer one of two incentives: zero percent financin

Question

A car dealer is offering to a buyer one of two incentives: zero percent financing or $3,000 cash back. If the car price (before the incentives) is $25,000, find the following to compare the two options in terms of monthly payments.

a. Financing through the dealer – Find the monthly payment to the car dealer for a $25,000 loan at zero percent interest for 5 years.

b. Financing through a bank – Find the monthly payment to a bank for a 5 year loan at 6% when the buyer finances the $22,000 cost through a bank (i.e. the buyer takes the $3,000 cash back incentive).

Explanation / Answer

Use the formula to calculate the monthly payment amount is: PV = Pmt((1-(1+i)-n))/i.

Alternatively we can also find out through excel using the formula: PMT(rate,nper,pv,fv,type)

a) Using the above formula, monthly payment turns to be = $416.67

b) Using the above formula, the new monthly payment turns to be = $425.32

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