Question

4. Rebate Versus Low Interest Rate. Kyle Parker of Concord, New Hampshire, has been shopping for a new car for several weeks. He has negotiated a price of $34,000 on a model that carries a choice of a $2,500 rebate or dealer financing at 2 percent APR. The dealer loan would require a $1,000 down payment and a monthly payment of $578 for 60 months. Kyle has also arranged for a loan from the bank with a 5 percent APR. Advise Kyle about whether he should use the dealer financing or take the rebate and get financing from the bank.

Answer 1

		Option of Rebate with bank loan :
	A	Negotiated price	$34,000
	B	Rebate	$2,500
	C=A-B	Amount to be paid	$31,500
	Pv	Loan Amount	$31,500
	Rate	Monthly interest rate=(5/12)%	0.416667%
	Nper	Number of months of payment	60	(5*12)
	PMT	Monthly payment	$594.44	(Using PMT function of excelwith Rate=0.416667%,Nper=60,Pv=-31500)
	R	Net Payment at Present Value	$31,500.00
		Option of Low Interest Rate :
	A	Negotiated price	$34,000
	B	Down payment	$1,000
	Pmt	Monthly Payment	$578
	Nper	Number of months of payment	60	(5*12)
	PV	Present Value of payments discounted at 0.416667%	$30,628.63	(Using PV function of excelwith Rate=0.416667%,Nper=60,Pmt=-578)
	L=PV+B	Net payment at Present Value	$31,628.63
		Low Interest Option ,Present Value of Payment is higher
		Hence, Rebate with bank loan option is recommended