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.

N	60	60
I/Y	5 / 12 = 0.4167	2 / 12 = 0.1667
PV	34,000 - 2,500 = 31,500	34,000 - 1,000 = 33,000
PMT	CPT	-578
FV	0	0
Total payments (60 x PMT)		60 x 578 = 34,680 + 1,000 = 35,680
Total financing costs (Total payments - PV)		35,680 - 33,000 = 2,680

Answer 1

We will need to compare the two options to determine which option has the minimum cash outflow.

Total Outflow under Option 1 i.e. REBATE is $35,667

Total Outflow under Option 2 i.e LOW INTEREST RATE is $35,705

Since outflow in case of rebate is less as compared to low interest rate, Kyle should opt for Rebate Option.

Please refer the detailed workings below.

For formulas used in the excel spreadsheet, refer the screenshots below

TNote - For loan taken from bank, no repayment detail has been provided in the question, so the period has been taken as 5 years i.e. 60 months similar to the dealer Financed period.

For any query or clarification, please leave a comment.