(Annuity payments) Ford Motor Company\'s current incentives include 4.7 percent

Question

(Annuity payments) Ford Motor Company's current incentives include 4.7 percent APR financing for 72 months or $1,100 cash back on a Mustang. Let's assume Suzie Student wants to buy the premium Mustang convertible, which costs $34,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,100 cash back, Suzie can borrow from the VTech Credit Union at 6.7 percent APR for 72 months. If Suzie chooses 4.7 percent APR financing for 72 months to buy the premium Mustang convertible, which costs $34,000 = PMT(62.632529), what will her monthly payment be? (Round to the nearest cent.)

If Suzie chooses $1,100 cash back to buy the premium Mustang convertible and borrows $32,900 from the VTech Credit Union at 6.7 percent APR for 72 months, how much will her monthly payment be? Which option should Suzie Student choose?

Explanation / Answer

Monthly payment in 1st case = Amount borrowed * APR/12 * (1 + APR/12)No. of months / [(1 + APR/12)No. of months - 1]

= $34,000 * 4.7%/12 * (1 + 4.7%/12)72 / [(1 + 4.7%/12)72 - 1]

= $542.85

Monthly payment in 2nd case = Amount borrowed * APR/12 * (1 + APR/12)No. of months / [(1 + APR/12)No. of months - 1]

= $32,900 * 6.7%/12 * (1 + 6.7%/12)72 / [(1 + 6.7%/12)72 - 1]

= $556.18

Overall payment in 1st case = 72 * $542.85

= $39,085.20

Overall payment in 2nd case = 72 * $556.18 - $1,100

= $38,944.96

Since, overall payment is lower in 2nd case and so 2nd option should be chosen.

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