A finance manager employed by an automobile dealership believes that the number

Question

A finance manager employed by an automobile dealership believes that the number of cars sold in his local market can be predicted by the interest rate charged for a loan.

The finance manager performed a regression analysis of the number of cars sold and interest rates using the sample of data above. Shown below is a portion of the regression output.

Are there factors other than interest rate charged for a loan that the finance manager should consider in predicting future car sales?

Is interest rate charged for a loan the most important factor to be considered in predicting future car sales? Explain your reasoning.The dealership’s vice-president of marketing has requested a sales forecast at the prevailing interest rate of 7%.

As finance manager, what reasons would you convey to the vice-president in recommending this forecasting model?

Is the prediction of car sales at 7% a reflection of the current downturn in the economy? How might this impact the dealership’s business?

Explanation / Answer

SOL)

The Regression model si y=a+bx

where x is Interest rate and y is number of cars sold.

Hence y= 14.88 - 1.61 53(Interest rates)

A) Since R sqare is 0.997. Hence The model is best model .We can conclude that finance manager need not to consider other factors since we have 99.7% variation is due to interest rate.

B)Yes interest rate charged for a loan the most important factor to be considered in predicting future car sales.

Since it has a good coefficient of determination(R sqaure).

Now forcasting the Number of cars when interest rate is 7%

y= 14.88 - 1.61 53(Interest rates)

y= 14.88 -1.6153 (7)

y= 3.57 (100's)

C)

Yes finance manager, what reasons would you convey to the vice-president in recommending this forecasting model Since correlation and coefficient of determination is high.

D) Yes the prediction of car sales at 7% a reflection of the current downturn in the economy.

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