Buying a Car You are buying a car. No Better Deals will give you $500 off the li

Question

Buying a Car

You are buying a car. No Better Deals will give you $500 off the list price on a $10,000 car.

You can get the same car from Best Deals if you pay $4,000 down and the rest at the end of 2 years. If the interest rate were 12 percent, where would you buy the car.

Best Deals has revised its offer.You now pay $2,000 down, $3,000 at the end of the first year, $5,000 at the end of the second year. If the interest rate were still 12 percent, where would you buy the car.

No Better Deals, in turn, makes a new offer. You pay $10,000, but you can borrow the sum from the dealer at 0.5 percent per month for thirty six months even though the going market rate is 1 percent per month, with the first payment made when the car is delivered. If you accept the offer, (1) What would your monthly payments be. (2)What would the cost of the car to you be.

Explanation / Answer

A) No better deal offer's PV of of cost of car = 10000 - 500 = 9500

Best deal offer's PV of of cost of car = 4000 + 6000/1.12^2 = 8783.16

Best deal offer should be accepted as it has lower PV of cost of car.

B) No better deal offer's PV of of cost of car = 10000 - 500 = 9500

Best deal offer's PV of of cost of car = 2000 + 3000/1.12 + 5000/1.12^2 = 8664.54

Best deal offer should be accepted as it has lower PV of cost of car.

C-1) Monthly payment under revised no better deal's offer: (Using excel formula)

=PMT(0.005,36,-10000,0,1)

= 302.71

C-2) PV of monthly payment (Cost of car): (Using excel formula):

=-PV(0.01,36,302.71,0,1)

= 9204.98

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