In: Finance

You
are about to purchase a brand new car for $23.400. You have $14.400
to put down and will need to finance the rest. The dealership has
two options.

1) Full price of the car and a loan of 0% interest for 3
years.

2) $1000 off the price of the car (known as cash back) and a
loan for the rest with an interest rate of 5.9% for 3 years

Which is the better option? (you must show work to justify
your answer)

**Option 2 is the
better option**

WORKING

Case 1

Full price of Car | 23,400 |

Interest Cost | 0 |

Total Outflow | 23,400 |

Case 2

Price of car (23,400 - 1000) | 22,400 |

Down Payment | 14,400 |

Financing Amount (Cost - Down Payment) | 8,000 |

Financing Period | 3 |

Interest Rate | 5.90% |

We need to calculate the Annual Payments on the financing Amount

Using Financial Calculator,

1. Insert 3 and press N (Time Period of Loan)

2. Insert 5.9% and press I/Y (Interest Rate on Loan)

3. Insert 8000 and press PV (Financing Amount)

4. Insert 0 and press FV (No End Amount)

5. Press CPT and Press PMT (Annual Payments)

Annual Payments = 2987.34

Total Payments on Financing Part = Annual Payments * Number of Years

Total Payments on Financing Part = 2987.34*3 = 8962.03

Total outflow in Case 2 = Down payment + Total Financing Payments

Total outflow in Case 2 = 14,400 + 8962.02 =
**23,362.03**

Difference in outflows between 2 cases = 23,400 - 23,362.03 =
**$37.97**

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