Question

​Ford's current incentives for customers looking to buy a Mustang include either financing at an APR of 4.2 percent compounded monthly for 72 months or $ 1 comma 500 cash back.​ Let's assume Suzie Student wants to buy the premium Mustang​ convertible, which costs $ 26 comma 000​, and she has no down payment other than the cash back from Ford. If she chooses the ​$1 comma 500 cash​ back, Suzie can borrow from the VTech Credit Union at an APR of 6.2 percent compounded monthly for 72 months. What will Suzie​ Student's monthly payment be under each​ option? Which option should she​ choose?

a. If Suzie chooses 4.2 percent financing for 72 months to buy the premium Mustang​ convertible, which costs ​$26 comma 000​, what will her monthly payment​ be? ​$ nothing  ​(Round to the nearest​ cent.)

b. If Suzie chooses ​$1 comma 500 cash back to buy the premium Mustang convertible and borrow ​$24 comma 500 fom the VTech Credit Union at an APR of 6.2 percent compounded monthly for 72 ​months, what will her monthly payment​ be? ​$ nothing  ​(Round to the nearest​ cent.)

c. Which option should Suzie Student​ choose?  ​(Select the best​ choice.

Choose

A. low interest rate financinglow interest rate financing

because the monthly payment under this option is lower.

B. cash back financingcash back financing

because the monthly payment under this option is lower.

Answer 1

Part a)

The value of monthly payment can be calculated with the use of PMT (Payment) function/formula of EXCEL/Financial Calculator. The function/formula for PMT is PMT(Rate,Nper,PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value and FV = Future Value (if any).

Here, Rate = 4.2%/12, Nper = 72, PV = $26,000 and FV = 0

Using these values in the above function/formula for PMT, we get,

Monthly Payment = PMT(4.2%/12,72,26000,0) = $409.15 (answer for Part a)

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Part 2)

The value of monthly payment can be calculated with the use of PMT (Payment) function/formula of EXCEL/Financial Calculator. The function/formula for PMT is PMT(Rate,Nper,PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value and FV = Future Value (if any).

Here, Rate = 6.2%/12, Nper = 72, PV = $24,500 and FV = 0

Using these values in the above function/formula for PMT, we get,

Monthly Payment = PMT(6.2%/12,72,24500,0) = $408.35 (answer for Part b)

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Part 3)

Cash back financing because the monthly payment under this option is lower. (which is Option B) [the answer is self-explanatory in nature]