Question

major car manufacturer is developing a

promotion that offers new car buyers the choice

between low interest financing at 0.9%

compounded monthly for 5 years or a cash

rebate. On a $30,000 car, what rebate makes

the buyer indifferent between the dealer’s

financing and taking the rebate and obtaining

bank financing at 4.6% compounded monthly for

the net cash price?

Answer 1

We can equate the payments for both the scenarios:

We shall first calculate the payments on 0.9% financing:

N	60	5*12
I/Y	0.08%	.9%/12
FV	0
PV	$       30,000.00
CPT PMT	$             511.52

Now we shall calculate the present value of these payments at 4.6%:

N	60	5*12
I/Y	0.3833%	(4.6%/12)
FV	-
PMT	$               511.52
CPT PV	$         27,370.90

Rebate = 1-(27370.90/30000)

=8.76%