You have decided to buy a car, the price of the car is $18,000. The car...

You have decided to buy a car, the price of the car is $18,000. The car dealer presents you with two choices:

(A) Purchase the car for cash and receive $2000 instant cash rebate – your out of pocket expense is $16,000 today.

(B) Purchase the car for $18,000 with zero percent interest 36-month loan with monthly payments.

Market interest rate is 4%. Which option above is cheaper? How much do you save?

Expert Solution

Under option A, total cash outflow at the outset is $16,000

Under option B,

Given, cost= $18,000. Interest rate=Nil and number of payments= 36

Monthly payments= $18,000/36 = $500

Also given, market interest rate=4%

Present value of monthly payments (assuming payments at the end of each month)= $16,935.38

Since the PV of option A is lower, that option is cheaper.

Money saved by choosing option A= 16,935.38-16,000 = $935.38

Calculation of PV as follows:

jeff jeffy answered 2 years ago

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