Question

In: Finance

major car manufacturer is developing a promotion that offers new car buyers the choice between low...

major car manufacturer is developing a

promotion that offers new car buyers the choice

between low interest financing at 0.9%

compounded monthly for 5 years or a cash

rebate. On a $30,000 car, what rebate makes

the buyer indifferent between the dealer’s

financing and taking the rebate and obtaining

bank financing at 4.6% compounded monthly for

the net cash price?

Solutions

Expert Solution

Price of car = $30,000

Financing Term = 5 year or 60 months

Car manufacturer provide financing at 0.90% per year compounded monthly. So, monthly payment if buyer choose manufacturer financing option is calculated in excel and screen shot provided below:

So, monthly payment if buyer choose manufacturer financing option is $511.52.

Other option is buyer take rebate from manufacturer and finance from outside at 4.6% compounded monthly. So, if in both case monthly payment is equal to $511.52 then buyer would be indifferent between both financing option.

Again if buyer choose to finance from outside at interest rate of 4.60%. So, current Value of car after rebate is calculated in excel and screen shot provided below:

Present value of monthly payment if financed from outside is $27,370.90.

So, value of rebate = $30,000 - $27,370.90

= $2,629.10.

Value of rebate is $2,629.10.

jeff jeffy answered 2 years ago
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