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?

I HAVE THE CORRECT ANSWER GIVEN BY MY PROFEESOR. I ONLY NEED TO SEE THE WORK ON EXCEL TO UNDERSTAND IT.

THE CORRECT ANSWER IS : Savings by choosing Option 1 $1,231.63 Interest $1,768.37 For option 1 $0.00 option 2

PLEASE USE THE PMT FORMULA!!!!

Explanation / Answer

1)

Compute the yearly payment using excel function.

Pmt = PMT(Rate,Nper,PV,FV) = PMT(4.75%,4,-17687.5,0) = $4959.15.

Total Payments = 4959.15 * 5 = $19836.60.

Interest portion = 19836.60-17687.5 = $2149.10.

Option 2:

Compute the PMT.

PMT = PMT(Rate,Nper,PV,FV) = PMT(0%,5,-20687.5,0) = $4137.5

Total payments = 4137.5 * 5 = $20687.50.

Interest = $20687.50-$20687.50 = $0

Particulars Amount($) Price of New Car 25000 Add: Taxes 8.75% 2187.5 Price including taxes 27187.5 Less: Trade in credit of existing car 1500 Price after credit 25687.5 Less: Down payment 5000 Amount still outstanding 20687.5 Less: Rebate 3000 Amount after rebate 17687.5

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