Question

Borrow or pay cash for an asset  Personal Finance Problem   Mark and Stacy McCoy are set to move into their first apartment. They visited Levin Furniture looking for a dining room table and buffet. Dining room sets are typically one of the more expensive home furnishing​ items, and the store offers financing arrangements to customers. Mark and Stacy have the cash to pay for the​ furniture, but it would definitely deplete their savings so they want to look at all their options. The dining room set costs $15,000 and Furniture​ R'Us offers a financing plan that would allow them to either​ (1) put 20% down and finance the balance at 3.8% annual interest over 48 months or​ (2) receive an immediate $500 cash​ rebate, thereby paying only $14,500 cash to buy the furniture. Bob and Carol currently earn 2.8% annual interest on their savings.

a.  Calculate the cash down payment for the loan.

b.  Calculate the monthly payment on the financed amount.  ​(​Hint:Treat the current loan as an annuity and solve for the monthly​ payment.)

c.  Calculate the initial cash outlay under the cash purchase option. Do not forget to reduce the​ cash-price by the cash down payment forgone on the loan​ (part

a​). For parts d​, ​e, and ​f, ignore the time value of money.

d.  Assume that they can earn a simple interest rate of 2.8% on​ savings, what will Bob and Carol give up​ (opportunity cost) over the 4 years if they pay​ cash?

e.  What is the cost of the cash alternative at the end of 4​ years?

f.  Should Bob and Carol choose the financing or the cash​ alternative?

Thank you in advance!

Answer 1

a) Down Payment = $15000 * 20%. = $5,000 b). monthly payment: - Balance Amount = 15000 - 3000 = 12,000 Annual Rate of interest : 3.8% Monthly interest rate: 18 = 0.3167% PURFA (n=u8, r= 0.3167%) = Who 46 monthly Installment = 12000 - $270. o nitial outlay $15000-500 = $14,500 2) Opportunity Cost over 4 year = 14500x 2,84 x 4 years (If they pay Cash) $1624 4). Gst of Goh alternative at the end of a yeard Initial Payment 2 14,500 Porterast bot for leys- 1624 $ 16124 Cost of financing alternative Initial Payment & Total monthly installment = 3000+ 48x270 - 3000+ 12960 - $ 15960 Got of Cash alternative $16,124 Cashout How of financing option is lower Hence financing option is choosen