Question

K Mautos is offering free credit on a new $110,000 car. You pay $2,0000 down and then $3500 a month for the next 30 months. Lemon Motors next door does not offer free credit but will give you $1,000 off the list price. If the rate of interest is 10% a year, which company is offering the better deal. Please help with an excel.

Answer 1

K.Mautos-

Interest rate = 10% per year = 10%/12 = 0.83% per month

We will discount each month's payment by dividing amount to be paid ($3500) by (1+0.83%)^n {n is no.of month).

Following excel shows amount, which is derived by dividing payment by discount factor. Discount factor =(1+0.83%)^n {n is no.of month).

Months	Payment	Discount Factor	Amount
0	20000
1	3500	1.008	3471.189
2	3500	1.017	3442.615
3	3500	1.025	3414.277
4	3500	1.034	3386.172
5	3500	1.042	3358.298
6	3500	1.051	3330.653
7	3500	1.060	3303.237
8	3500	1.068	3276.045
9	3500	1.077	3249.078
10	3500	1.086	3222.333
11	3500	1.095	3195.807
12	3500	1.104	3169.501
13	3500	1.113	3143.41
14	3500	1.123	3117.535
15	3500	1.132	3091.872
16	3500	1.141	3066.421
17	3500	1.151	3041.179
18	3500	1.160	3016.145
19	3500	1.170	2991.317
20	3500	1.180	2966.694
21	3500	1.190	2942.273
22	3500	1.199	2918.053
23	3500	1.209	2894.032
24	3500	1.219	2870.21
25	3500	1.230	2846.583
26	3500	1.240	2823.151
27	3500	1.250	2799.912
28	3500	1.260	2776.864
29	3500	1.271	2754.005
30	3500	1.281	2731.335

Sum of all payments = 20,000 + 92,610 (sum of all payments discounted of 30 months) = $112,610

Lemon Motors- Payment to be made = 110,000 - 1000 = $109,000

So, Lemon Motors is better option.