Question

Two years ago, you purchased a $18,000 car, putting $3,500 down and borrowing the rest. Your loan was a 36-month fixed rate loan at a stated rate of 7.0% per year. You paid a non-refundable application fee of $100 at that time in cash. Interest rates have fallen during the last two years and a new bank now offers to refinance your car by lending you the balance due at a stated rate of 4.5% per year. You will use the proceeds of this loan to pay off the old loan. Suppose the new loan over the residual loan life requires a $200 non-refundable application fee. Given all this information, should you refinance? How much do you gain/lose if you do?

A.no,lose 69.59
B.yes,gain 69.59
C.no,lose 130.41
D,yes agin 130.41

Answer 1

car cost	18000
down payment	3500
finance	14500
rate	0.583%	(7%/12)
NPER	36	(3 X 12)
PMT(emi)	$447.69
	=PMT(0.00583,36,-14500)
Present value of loan	$5,174.01
	=PV(0.07/12,12,-447.72)
New bank finance	$5,374.01
(5174.01+200)
rate	0.375%	(4.5%/12)
NPER	12
PMT(emi)	$458.83
	=PMT(0.00375,12,-5374.01)
Difference in EMI	$                                      11.134
Present value of difference in EMI at 0.375%
	$130.41	So , he will lose $130.41, no he should not refinance
	=PV(0.375%,12,-11.134)	Option C