Question

#6. there is a choice to buy a car worth $32,000 with 100% financing at 3.99% APR for 60 months or lease at $500 per month. The car will need maintenance in the 3rd year worth $525 and $825 in the 4th year. the car will have 30% residual value in the 5th year. sales tax on new car is 6% and required rate of return is 5%.

calculate the cost of owning this car in year 4

a-$6335

b-$7164

c-$7895

d-$6850

Answer 1

Cost of car = $32000, APR = 3.99%, No of months of loan = 60

Since there is an option to purchase car with 100% financing hence loan = 100% of cost of car = 100% of 32000 = 32000

Monthly rate of interest = APR / 12 = 3.99% / 12

First we will find monthly loan payment for purchasing the car using pmt function in excel

Formula to be used in excel: =pmt(rate,nper,-pv)

Using pmt function in excel, we get monthly loan payment for purchasing or owning the car = $589.18

Total amount towards loan in year 4 = monthly payment of loan x 12 = 589.18 x 12 = 7070.16

Total amount towards ownership of car in year 4 = Total amount towards loan in year 4 + maintenance expense in year 4 = 7070.16 + 825 = $7895.16 = $7895 (rounded to nearest dollar)

Since total amount towards ownership of car in year 4 is a cash outflow, hence cost of ownership of car in year 4 = - Total amount towards ownership of car in year 4 = -$7895   (negative sign for cash outflow)

Answer is c -$7895