Question

In: Accounting

P2. Car Shopping You have just gone car shopping for a new SUV. You are trying...

P2. Car Shopping

You have just gone car shopping for a new SUV. You are trying to play one dealer off another. You have the following two deals to consider. Dealer 1 is offering you the car at a $6,000 discount off of the list price of $30,000. He is offering you a car loan with no money down and making annual payments over five years at 12 percent interest. You went to the bank and found that 12 percent annual interest is what they would have charged you too. Dealer 2, on the other hand did not budge on price, but he had an attractive financing offer of 3.6% over 4 years on the same $30,000 vehicle.

Part 1.

Which dealer should he buy from (assume one payment per year)? Show your analysis in an Excel spreadsheet. Print that sheet and your writeup should be one or two paragraphs explaining your decision and showing me that you understand the numbers.

Part 2.

Car loans actually require monthly payments, not annual payments. Assume the same facts except that the payments are monthly. Does this change your decision? Explain why or why not briefly. Normally, I would ask for supporting calculations. You don’t need to attach your detailed amortization schedule for the monthly loan. Provide the pertinent information only that you used to make your decision (keep it brief).

You can type (or write legibly) your rationale for your loan selection(s) below. (and attach annual payment spreadsheet results on the next page)

Solutions

Expert Solution

Part 1:

The loan amount in case of dealer 1 is 30,000 – 6,000 = $24,000. We can use the “PMT” function here and the variables are Nper = 5 and rate = 12%. Excel’s PMT function gives a value of an annual payment of $6657.83

For dealer 2 there is no discount and so loan amount = 30,000. Nper = 4 and rate = 3.6%. Annual payment = 8186.93 (again using the PMT function).

Dealer 1 Dealer 2
Year Principal due at the start of the year Annual Payment Principal paid Interest paid Principal due at the end of the year Year Principal due at the start of the year Annual Payment Principal paid Interest paid Principal due at the end of the year
1 24,000.00 6,657.83 3,777.83 2,880.00 20,222.17 1 30,000.00 8,186.93 7,106.93 1,080.00 22,893.07
2 20,222.17 6,657.83 4,231.17 2,426.66 15,990.99 2 22,893.07 8,186.93 7,362.78 824.15 15,530.29
3 15,990.99 6,657.83 4,738.91 1,918.92 11,252.08 3 15,530.29 8,186.93 7,627.84 559.09 7,902.44
4 11,252.08 6,657.83 5,307.58 1,350.25 5,944.49 4 7,902.44 8,186.93 7,902.44 284.49 0.00
5 5,944.49 6,657.83 5,944.49 713.34 0.00
Total 2,747.73
Total 9,289.17

As we can see that in case of purchase from dealer 2 the total interest amount = $2747.73 and that from dealer 1 = 9289.17. Difference = 9289.17 - 2747.73 = 6541.44

As 6541.44>6000 (the discount amount) the car should be purchased from dealer 2.

Part 2: Here for dealer 1 nper = 5*12 = 60 and rate = 12%/12. In case of Dealer 2, nper = 4*12 = 48 and rate = 3.6%/12

Dealer 1
Month Principal due at the start of the month Monthly payment Principal paid Interest paid Principal due at the end of the month
1.00 24,000.00 533.87 293.87 240.00 23,706.13
2.00 23,706.13 533.87 296.81 237.06 23,409.33
3.00 23,409.33 533.87 299.77 234.09 23,109.55
4.00 23,109.55 533.87 302.77 231.10 22,806.78
46.00 7,402.09 533.87 459.85 74.02 6,942.24
47.00 6,942.24 533.87 464.44 69.42 6,477.80
48.00 6,477.80 533.87 469.09 64.78 6,008.71
49.00 6,008.71 533.87 473.78 60.09 5,534.93
50.00 5,534.93 533.87 478.52 55.35 5,056.41
51.00 5,056.41 533.87 483.30 50.56 4,573.11
52.00 4,573.11 533.87 488.14 45.73 4,084.98
53.00 4,084.98 533.87 493.02 40.85 3,591.96
54.00 3,591.96 533.87 497.95 35.92 3,094.01
55.00 3,094.01 533.87 502.93 30.94 2,591.09
56.00 2,591.09 533.87 507.96 25.91 2,083.13
57.00 2,083.13 533.87 513.04 20.83 1,570.09
58.00 1,570.09 533.87 518.17 15.70 1,051.93
59.00 1,051.93 533.87 523.35 10.52 528.58
60.00 528.58 533.87 528.58 5.29 0.00
Total 8,032.00
Dealer 2
Month Principal due at the start of the month Monthly payment Principal paid Interest paid Principal due at the end of the month
1 30,000.00 672.02 582.02 90.00 29,417.98
2 29,417.98 672.02 583.76 88.25 28,834.22
3 28,834.22 672.02 585.51 86.50 28,248.71
4 28,248.71 672.02 587.27 84.75 27,661.44
46 2,004.01 672.02 666.00 6.01 1,338.01
47 1,338.01 672.02 668.00 4.01 670.01
48 670.01 672.02 670.01 2.01 0.00
Total 2,256.72

Differential for interest rates = 8032-2256.72 = 5775.28

As 5775.28<6000 (discount amount) the car should be purchased from dealer 1.

Thus for part 1 purchased should be made from dealer 2 and in case of part 2 purchase should be made from dealer 1.


Related Solutions

You have a job that you really dislike. You have just gone to interview for a...
You have a job that you really dislike. You have just gone to interview for a job that you really like, and the interview went well, but the result will not be known until a month later, and there is no way you can find out any more information about it before then. In the meantime, another employer offers you a job that is better than your current job, but it demands your acceptance in a week or the offer...
You have a job that you really dislike. You have just gone to interview for a...
You have a job that you really dislike. You have just gone to interview for a job that you really like, and the interview went well, but the result will not be known until a month later, and there is no way you can find out any more information about it before then. In the meantime, another employer offers you a job that is better than your current job, but it demands your acceptance in a week or the offer...
You are trying to pick the least expensive car for your new delivery service. You have...
You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of...
A car company claims that its new SUV gets better gas mileage than its competitor’s SUV....
A car company claims that its new SUV gets better gas mileage than its competitor’s SUV. A random sample of 35 of its SUVs has a mean gas mileage of 12.6 miles per gallon (mpg). The population standard deviation is known to be 0.4 mpg. A random sample of 31 competitor’s SUVs has a mean gas mileage of 12.4 mpg. The population standard deviation for the competitor is known to be 0.3 mpg. Test the company’s claim at the 0.05...
You are trying to pick the least-expensive car for your new delivery service. You have two...
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $20,000 to purchase and which will have OCF of –$2,400 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $28,500 to purchase and which will have OCF of –$1,250 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their...
You are trying to pick the least-expensive car for your new delivery service. You have two...
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $16,500 to purchase and which will have OCF of −$1,700 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $24,000 to purchase and which will have OCF of −$900 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their...
You are trying to decide whether to keep your current car or buy a new car....
You are trying to decide whether to keep your current car or buy a new car. If you keep your current car you will pay $350 per month (starting next month) on average for maintenance, gas, property tax and insurance. You will make these payments for 10 years. Alternatively, you can buy a new car and pay $28,000 today and $300 per month (starting next month) on average for maintenance, gas, property tax and insurance. You will make these payments...
You are trying to decide whether to keep your current car or buy a new car....
You are trying to decide whether to keep your current car or buy a new car. If you keep your current car you will pay $350 per month (starting next month) on average for maintenance, gas, property tax and insurance. You will make these payments for 10 years. Alternatively, you can buy a new car and pay $28,000 today and $300 per month (starting next month) on average for maintenance, gas, property tax and insurance. You will make these payments...
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with...
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.3% APR. You monthly payments are $640 and you have just made your 24th monthly payment on your SUV. a. What is the amount of your original loan? The amount of the original loan is $. (round to the nearest dollar) b. Assuming that you have made all of the first 24...
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with...
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.2% APR. You monthly payments are $635 and you have just made your 24th monthly payment on your SUV. a. What is the amount of your original loan? The amount of the original loan is $. (round to the nearest dollar) b. Assuming that you have made all of the first 24...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT