Exercise 1 - Time value of money: You want to buy a brand new Tesla Model S car.

Question

Exercise 1 - Time value of money: You want to buy a brand new Tesla Model S car. The dealer offers you 3 payment options: (1) Make monthly payments of $2,325 over a period of 3 years at the end of every month. (2) Pay $10,000 upfront, and S65,000 3 years from now. (3) Make 3 equal payments at the end of every year so that the present value is equal to $85,253. Annual interest rate is 12%. Required: Calculate the present value of option (1). Calculate the present value of option (2). 1. 3. Calculate the amount of the equal payment in option (3) 4. Which option is preferable? Explain

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1. PV of Option 1 Payment Period (months) Rate (monthly) PVAF 1%,36 Months Present Value 5235*30.10751 5235 36 1% 30.10751 157613 2. PV of Option 2 Payment Period (months) Rate (monthly) PV 12%, 3 Year Present Value 10000 0 12% 1 10000 65000 1-3 12% 2.4018 156117 Present Value 166117 3. Amount of Equal payment PVAF 12%, 3 Year= 2.4018 Present Value 85253 Amount of Equal payment 85253/2.4018 Amount of Equal payment 35495 4. Option three is preferebale as having lowest ouflow PV

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