After about 10 months of saving $500 a month, Mary has achieved her goal of savi

Question

After about 10 months of saving $500 a month, Mary has achieved her goal of saving $ 5,000 that she will use as a down payment on a new car. Mary’s new car is priced at $25,000 plus 8.75% sales tax. She will receive a $1,500 trade in credit on her existing car and will make a $5,000 down payment on the new car. When she went to a dealer, the dealer offered the following two options:

Option 1) Receive a $3,000 rebate on the price of the car and finance the balance over 4 years at 4.75%

Option 2) Finance the vehicle for 5 years at 0% interest, but no rebate. Which option would you suggest based on the total cost? How much would Mary save by selecting one option over another over the repayment period?

Please Show all work on excel by using Pmt formula. Thanks. The answer is : Savings by choosing Option 1 $1,231.63 Interest $1,768.37 for option 1 $0.00 option 2

Explanation / Answer

cost of car = 25000 * (1+8.75%) = 27187.5

option1

amount of loan needed = 27187.5 - 5000 - 1500 - 3000

= 17687.5

annual payment * [1 - (1.0475)^-4]/0.0475 = 17687.5

=>
annual payment = 4959.15

total annual payments = 4959.15 * 4 = 19836.6

toal cost towards car

= 5000 + 1500 + 19836.6

= 26336.6

option 2 :

cost payed towards car

= 27187.5

hence option 1 is more profitable

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