You want to purchase a new car. The price of the car is $24,035. The dealer is c

Question

You want to purchase a new car. The price of the car is $24,035. The dealer is currently offering a special promotion: You can choose a $1500 rebate up front or 0% financing for the first 36 months and 6% financing for the the remaining 24 months of your loan. Which is the better deal, the $1500 rebate or the 0% financing for the first three years followed by 6% financing for the last two years of the loan? Justify your answer by computing your monthly payments over 60 months under each of the two options.

Explanation / Answer

SOLUTION:

Under 0% financing, we have P = $24,035; r = 0; n = 36

R1 = $24035 / 36 = $667.63

With the rebate option, we have P = $24,035 - $1500 = $22,535; r = 0.06; n = 24

The monthly payment would be,

R2 = $22,535 (0.06) / 1

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