Question

In: Finance

You are about to purchase a brand new car for $23.400. You have $14.400 to put...

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)

Solutions

Expert Solution

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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