Question

In: Finance

Karim Soltan is shopping for a new vehicle, and has noticed that many vehicle manufacturers are...

Karim Soltan is shopping for a new vehicle, and has noticed that many vehicle manufacturers are offering special deals to sell off the current year’s vehicles before the new models arrive. Karim’s local Ford dealership is advertising 3.9% financing for a full 48 months (i.e., 3.9% compounded monthly) or up to $4000 cash back on selected vehicles.

The vehicle that Karim wants to purchase costs $24 600 including taxes, delivery, licence, and dealer preparation. This vehicle qualifies for $1800 cash back if Karim pays cash for the vehicle. Karim has a good credit rating and knows that he could arrange a vehicle loan at his bank for the full price of any vehicle he chooses. His other option is to take the dealer financing offered at 3.9% for 48 months.

Karim wants to know which option requires the lower monthly payment. He knows he can use annuity formulas to calculate the monthly payments.

Questions
a. Suppose Karim buys the vehicle on July 1. What monthly payment must Karim make if he chooses the dealer’s 3.9% financing option and pays off the loan over 48 months? (Assume he makes each monthly payment at the end of the month and his first payment is due on July 31.)
b. Suppose the bank offers Karim a 48-month loan with the interest compounded monthly and the payments due at the end of each month. If Karim accepts the bank loan, he can get $1800 cash back on this vehicle.

Help Karim work out a method to calculate the bank rate of interest required to make bank financing the same cost as dealer financing. First, calculate the monthly rate of interest that would make the monthly bank payments equal to the monthly dealer payments. Then calculate the effective rate of interest represented by the monthly compounded rate. If the financing from the bank is at a lower rate of interest compounded monthly, choose the bank financing. The reason is that the monthly payments for the bank’s financing would be lower than the monthly payments for the dealer’s 3.9% financing.
(i) How much money would Karim have to borrow from the bank to pay cash for this vehicle?
(ii) Using the method above, calculate the effective annual rate of interest and the nominal annual rate of interest required to make the monthly payments for bank financing exactly the same as for dealer financing.
c. Suppose Karim decides to explore the costs of financing a more expensive vehicle. The more expensive vehicle costs $34 900 in total and qualifies for the 3.9% dealer financing for 48 months or $2500 cash back. What is the highest effective annual rate of interest at which Karim should borrow from the bank instead of using the dealer’s 3.9% financing?

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

22. Alex Wall is shopping for a new four-wheel-drive utility vehicle and has identified three models...
22. Alex Wall is shopping for a new four-wheel-drive utility vehicle and has identified three models from which she will choose—an Explorer, a Trooper, and a Passport. She will make her selection based on Consumer Digest ratings, price, and each vehicle’s appearance. Following are Alex’s pairwise comparisons for the vehicles for each of her criteria and her criteria preferences: Consumer Digest Rating Vehicle      Explorer     Trooper Passport Explorer 1 4 3 Trooper 1/4 1 1/2 Passport 1/3 2 1...
Jurica Corporation manufactures various trim pieces for vehicle manufacturers. The company has a number of plants,...
Jurica Corporation manufactures various trim pieces for vehicle manufacturers. The company has a number of plants, including the Juriquilla Plant, which makes door trim pieces. Mr. Bates is both the regional manager for the Central America region and the plant manager of the Juriquilla Plant. His budget as the regional manager is charged to the Juriquilla Plant. Bates has just heard that the company received a bid from an outside vendor to supply the equivalent of the entire annual output...
An airline maintenance manager has a bright idea. He has noticed that many “C” check write-ups...
An airline maintenance manager has a bright idea. He has noticed that many “C” check write-ups are generated from leaky and loose components in the aircraft’s ground spoiler system. He suspects that by deactivating these ground spoilers, he can save money on “C” checks without appreciably effecting ground roll distances on landing. He thinks that reverse thrust and braking alone will be more than enough, and the ground spoilers are not necessary. He tested his theory by deactivating the ground...
Viking InterWorks is one of many manufacturers that supplies memory products to original equipment manufacturers (OEMs)...
Viking InterWorks is one of many manufacturers that supplies memory products to original equipment manufacturers (OEMs) of desktop systems. The CEO recently read an article in a trade publication that reported the projected demand for desktop systems to be: Qddesktop = 1600 - 2Pdesktop + 0.6M (in millions of units), where Pdesktop is the price of a desktop system and M is consumer income. The same article reported that the incomes of the desktop system’s primary consumer demographic would increase...
Manufacturers of aircraft engines have, like many other industrial manufacturers, tried to make engines that are...
Manufacturers of aircraft engines have, like many other industrial manufacturers, tried to make engines that are more economical to operate while still providing the power needed to fly large-capacity aircraft. The Boeing 747, long considered the workhorse of the jumbo jet fleet, is powered by four engines, each capable of 44,700 lbs of thrust. Because 747’s have been around since 1969, maintenance costs now are relatively fixed; the goal for any airline is to plan for consistent, predictable maintenance costs....
Viking InterWorks is one of many manufacturers that supplies memory products to original equipment manufacturers (OEMs)...
Viking InterWorks is one of many manufacturers that supplies memory products to original equipment manufacturers (OEMs) of desktop systems. The CEO recently read an article in a trade publication that reported the projected demand for desktop systems to be: Qddesktop = 1600 - 2Pdesktop + 0.6M (in millions of units), where Pdesktop is the price of a desktop system and M is consumer income. The same article reported that the incomes of the desktop system’s primary consumer demographic would increase...
A vehicle costs $10,000 when new and has a trade-in value of $7,200 at the end...
A vehicle costs $10,000 when new and has a trade-in value of $7,200 at the end of four years. Its operating expense is $4,000 per year with an additional $2,000 for tires, tune up and battery at the end of the second year. All values are given in today's dollars. What is the equivalent annual cost of owning this vehicle for four years assuming a 10% market interest rate and expected inflation of 2%?
You are looking to purchase a new vehicle for $24,500. This vehicle gets 21 mpg and...
You are looking to purchase a new vehicle for $24,500. This vehicle gets 21 mpg and you average driving 15,000 miles per year. You expect that gasoline will average $2.40 per gallon for the first year and will increase 15% per year but it will never get above $5 per gallon because of government controls. Maintenance is included for the first two years but after that you think that maintenance will cost $1,000 and increase by 10% per year after...
Depreciation Schedules & Disposals Madrigal Corporation acquired a new vehicle for $82,000. The asset has a...
Depreciation Schedules & Disposals Madrigal Corporation acquired a new vehicle for $82,000. The asset has a 5 year expected useful life and a residual value of $7,000. Prepare depreciation schedules for all five years under both the straight-line and double-declining balance methods. Straight Line Method year depreciation expense Accumulated depreciation Net Book Value 1 2 3 4 5 Double- Declining Balance Method year depreciation expense Accumulated depreciation Net Book Value 1 2 3 4 5 Calculate the gain or loss...
Many individuals have been to a corner market in a city and noticed soggy lettuce, a...
Many individuals have been to a corner market in a city and noticed soggy lettuce, a moldy cucumber or other far from fresh produce being offered to that community in that specific area. Until now, many may not have known that this is what is referred to as a Food Desert. Why is it that we do not see similar grocery stores in these areas as we do in more rural communities? As a result, what does this do to...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT