You will put $1200 down on a car and want a 4 year loan. You could...

You will put $1200 down on a car and want a 4 year loan. You could buy a new car for $15,000 (interest rate 6%) or the same model car that is 2 years old for $11,500 (interest rate 6.5%). The new car has a monthly payment of $305.31 and the used car has a monthly payment of $244.26. Explain what you would pick and why.

Expert Solution

Buying a new car is a better option, which can be explained as follows:

To determine which option is better, we need to calculate the IRR of both the options. The option with lower IRR is bettwer as you will have to pay a lower cost of capital for financing the loan for car.

New Car		Old Car
At the beginning (month 0), you need to take a loan of $15,000 less $1200 down payment, i.e. loan of $13,800 and for the next 4 years, you will make monthly payments of $305.31 i.e. 48 monthly payments		At the beginning (month 0), you need to take a loan of $11,500 less $1200 down payment, i.e. loan of $10,300 and for the next 4 years, you will make monthly payments of $244.26 i.e. 48 monthly payments





Month	Net cash Flows	Month	Net cash Flows
0	13800	0	10300
1	-305.31	1	-244.26
2	-305.31	2	-244.26
3	-305.31	3	-244.26
4	-305.31	4	-244.26
5	-305.31	5	-244.26
6	-305.31	6	-244.26
7	-305.31	7	-244.26
8	-305.31	8	-244.26
9	-305.31	9	-244.26
10	-305.31	10	-244.26
11	-305.31	11	-244.26
12	-305.31	12	-244.26
13	-305.31	13	-244.26
14	-305.31	14	-244.26
15	-305.31	15	-244.26
16	-305.31	16	-244.26
17	-305.31	17	-244.26
18	-305.31	18	-244.26
19	-305.31	19	-244.26
20	-305.31	20	-244.26
21	-305.31	21	-244.26
22	-305.31	22	-244.26
23	-305.31	23	-244.26
24	-305.31	24	-244.26
25	-305.31	25	-244.26
26	-305.31	26	-244.26
27	-305.31	27	-244.26
28	-305.31	28	-244.26
29	-305.31	29	-244.26
30	-305.31	30	-244.26
31	-305.31	31	-244.26
32	-305.31	32	-244.26
33	-305.31	33	-244.26
34	-305.31	34	-244.26
35	-305.31	35	-244.26
36	-305.31	36	-244.26
37	-305.31	37	-244.26
38	-305.31	38	-244.26
39	-305.31	39	-244.26
40	-305.31	40	-244.26
41	-305.31	41	-244.26
42	-305.31	42	-244.26
43	-305.31	43	-244.26
44	-305.31	44	-244.26
45	-305.31	45	-244.26
46	-305.31	46	-244.26
47	-305.31	47	-244.26
48	-305.31	48	-244.26
Monthly IRR	0.248%	Monthly IRR	0.542%

To calculate the monthly IRR, use a financial calulator.

For new car: CF0 = 13800 Enter, C01 = -305.31 enter, F01 = 48 Enter, Compute IRR = 0.248%
For old car: CF0 = 10300 Enter, C01 = -244.26 enter, F01 = 48 Enter, Compute IRR = 0.542%

Calculate yearly IRR, using the formula:

Yearly IRR = [(1+monthly IRR)^12]-1

For new car: Yearly IRR = [(1+0.00248)^12]-1 = 3.02%
For old car: Yearly IRR = [(1+0.00542)^12]-1 = 6.70%

Thus, if you buy the new car its cost will be much lower at 3.02% per annum as compared to 6.07% per annum for buying the old car. Thus, it is better to purchase a new car.

jeff jeffy answered 1 year ago

You want a bank loan in order to buy a car (with no down payment of...

You want a bank loan in order to buy a car (with no down payment of your own). You already own a house on which you pay $1,600 per month in mortgage payments, $300 per month in property taxes and $100 per month in utilities. Your gross family income is $80,000 per year. You have no other debts. The bank is willing to give you a loan which will be amortized over 5 years (i.e., 60 monthly payments). The interest...

You want to buy a new car for $25,000. You put $2000 down and are given...

You want to buy a new car for $25,000. You put $2000 down and are given $2000 as trade-in for your current car. You take out a loan for the remaining $21,000. The terms of the loan are an annual interest rate of 4.8% compounded monthly. You are to make 60 equal monthly payments (end of month) to pay off the loan. how can i get the answer using excel

You want to buy a new car at $50K. The loan offered is at 4% per...

You want to buy a new car at $50K. The loan offered is at 4% per year for 6 years. What is the monthly payment?

1.You want to finance a car for $25,000. You agree to a 5 year loan with...

1.You want to finance a car for $25,000. You agree to a 5 year loan with a monthly interest rate of 0.55 percent. What is your required monthly payment? 2.How are bond prices and interest rates related? Use the terms 'discount', 'par', and 'premium' in your explanation.

You are buying a car for $25,000. You will put no money down and get a...

You are buying a car for $25,000. You will put no money down and get a loan for the full purchase price. The bank offers you the following loan terms: APR 8% (Annual percentage rate), 3 year loan with quarterly payments. Create an amortization schedule paying off the loan.

You just purchased a car for $50,000. You paid $10,000 for the down payment and the rest is the loan. The car loan is for 36 months at an annual

You just purchased a car for $50,000. You paid $10,000 for the down payment and the rest is the loan. The car loan is for 36 months at an annual interest rate of 6%. The loan payments should be made at the end of each month.A. How much is the monthly payment on the loan? Total monthly payment is ________.B. How much of the monthly payment is the interest payment in month 17?The interest amount is ________.C. How much of...

You are buying a car for $10,000. You will put down $1,000 of your own money...

You are buying a car for $10,000. You will put down $1,000 of your own money and get a loan for the rest of the purchase price. The bank offers you the following loan terms: APR 6% (Annual percentage rate), 1 year loan with monthly payments. 1. Calculate the amount of the loan payment (PMT): 2. Create an amortization schedule paying off the loan.

You are buying a car for $35,000. You will put $2,000 of your own money down...

You are buying a car for $35,000. You will put $2,000 of your own money down and get a loan for the rest of the purchase price. The bank offers you the following loan terms: APR 12% (Annual percentage rate), 6 year loan with annual payments. Calculate the amount of the loan payment (PMT): Create an amortization schedule paying off the loan.

You want to buy a car, and a local bank will lend you $10,000.The loan...

You want to buy a car, and a local bank will lend you $10,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 8% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR? Do not round intermediate calculations. Round your answer for the monthly loan payment to the nearest cent and for EAR to two decimal places.

You want to buy a car, and a local bank will lend you $25,000.The loan...

You want to buy a car, and a local bank will lend you $25,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 5% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR? Do not round intermediate calculations. Round your answer for the monthly loan payment to the nearest cent and for EAR to two decimal places.Monthly loan payment: $EAR: %Find the following...

Question