You can buy a car that is advertised for $25,920 on the following terms: (a) pay

Question

You can buy a car that is advertised for $25,920 on the following terms: (a) pay $25,920 and receive a $4,920 rebate from the manufacturer; (b) pay $540 a month for 4 years for total payments of $25,920, implying zero percent financing.

Calculate the present value of the payments for option (b), if the interest rate is 1.25% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option b

You can buy a car that is advertised for $25,920 on the following terms: (a) pay $25,920 and receive a $4,920 rebate from the manufacturer; (b) pay $540 a month for 4 years for total payments of $25,920, implying zero percent financing.

Explanation / Answer

a. Present value = $ 25920- $ 4920 = $ 21,000

b . Presesnt value of option (b) = $ 25,920 x PVF@15% p a

c. Option (b) is better than (a) because of less inetial discounted cash outflow .

Year Cash flow PVF@15% Discounted cash flow 1 6480 0.8696 5635.01 2 6480 0.7561 4899.53 3 6480 0.6575 4260.60 4 6480 0.5718 3705.26 Present value 18500.40

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