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Lina Martinez wants to buy a new high-end audio system for her car. The system is...

  1. Lina Martinez wants to buy a new high-end audio system for her car. The system is being sold by two dealers in town, both of whom sell the equipment for the same price of $2,000. Lina can buy the equipment from Dealer A, with no money down, by making payments of $175.83 a month for 12 months; she can buy the same equipment from Dealer B by making 36 monthly payments of $68.36 (again, with no money down). Lina is considering purchasing the system from Dealer B because of the lower payment.

  1. Find the APR for Dealer A. Use a financial calculator to find the answer. Round the answer to 2 decimal places.  (1)

  1. Find the APR for Dealer B. Round the answer to 2 decimal places.  (1)

What do you recommend?  (1)

Solutions

Expert Solution

a) We are given the following information

Monthly payment PMT $                175.83
rate of interest r To be calculated
number of years n 1 year or 12
Annual Compounding frequency 12
Cost at time 0 PV $ 2,000.00

We need to solve the following equation to arrive at the required r

b) We are given the following information

Monthly payment PMT $                68.36
rate of interest r To be calculated
number of years n 3 years or 36
Annual Compounding frequency 12
Cost at time 0 PV $ 2,000.00

We need to solve the following equation to arrive at the required r

c) She should go with Dealer A as the interest rate paid is lower. If we calculate the total amount paid, for dealer A it would be 175.83 x 12 = 2109.96 while that for dealer B would be  $2,460.96 the difference is due to higher interest rate so even with lower payments, total interest paid is higher in case of dealer B

jeff jeffy answered 2 years ago
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