You would like to buy a new car that costs $25,000. The dealer offers you a...

You would like to buy a new car that costs $25,000. The dealer offers you a 3-year loan at an 8% interest rate, and because that rate is higher than market rates they offer to lower the price by $2,000. Assuming you make the required payment, should you accept his offer or seek alternative financing at the 3% rate?

Solutions

Expert Solution

Sol:

Option 1

Car cost = $25,000

Discount offer = $2,000

Car cost after discount (PV) =25,000 - 2,000 = $23,000

Period (NPER) = 3 year, Monthly = 3 * 12 = 36

Interest rate = 8%, Monthly = 8% / 12 = 0.6667%

To compute the monthly payment to be made we can use PMT function in excel:

PV	-23000
NPER	36
Interest rate	0.6667%
Monthly payment	$720.74

Option 2

Car cost = $25,000

Period (NPER) = 3 year, Monthly = 3 * 12 = 36

Interest rate = 3%, Monthly = 3% / 12 = 0.25%

PV	-25000
NPER	36
Interest rate	0.25%
Monthly payment	$727.03

Your monthly payment on option 1 will be $720.74 and monthly payment on option 2 will be $727.03. Therefore you should accept the offer provided in option 1 as your monthly loan payment will be less than option 2.

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jeff jeffy answered 1 year ago

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