You have decided to purchase a new automobile with a hypnd-fueled engine and a s

Question

You have decided to purchase a new automobile with a hypnd-fueled engine and a six-speed transmission. After the trade-in of your present car. the purchase pricc of the nevs automobile is $30,000. This balance can be financed by an auto dealer at 3%APR with payment over 48 months. Alternatively, you can gel a $2000 discount on the purchase price if you finance the loan balance at an APR of 9degreei over 48 months Should you accept the 3 degreeo finance plan or accept the dealer's offer of a $2000 rebate with 9degree c Financing ? Both APR are compounded monthly.

Explanation / Answer

First calculate effective Int. Rate for both %

1. EIR= [1+(r/n)]n-1

=[1+(0.03/48)]48-1

= 3.05%

2. EIR= [1+(0.09/48)]48-1

= 9.41%

Now get the present value of each option

option 1:

30000/48

Installment amount= $625

Present value= 625* CDF%@3.05%

=625*25.035

= $15647

option 2:

(30000-2000)/48

Installment= 983.33 * CDF@9.41%

=983.33 * 10.4852

=$10310.41

select the one which has lowest outflow. So option 2 should be selected,

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