Question

You are in the market to purchase a new automobile. Marginal Deal, Inc. will give you a deal of $500 off the list price on a $10,000 Porsche. Consider the following historical events relating to your automobile purchase.

a. You can get the same car from Great Deals, Inc. if you pay $4,000 down and the rest at the end of two years. If the interest rate were 12.5 percent, where would you purchase the car?

b. Great Deals, Inc. has revised its offer. You now pay $2,000 down, $3,000 at the end of the first year and $5,000 at the end of the second year. If the interest rate is still 12.5 percent, where would you buy the new Porsche?

c. Marginal Deal, Inc., in turn, makes a new offer. You pay $10,000, but you can borrow the sum from the dealer at 0.5 percent per month for 36 months even though the going market rate is 1 percent per month, with the first payment made when the car is delivered. If you accept the offer, (1) what would your monthly payments be? (2) What would the cost of the Porsche to you be?

Answer 1