Question

You want a new SUV. You have picked the one you want and are now negotiating the price and terms. The vehicle company has given you two options: • You can buy the car for $60,000 with 90% financing at an advertised rate of 0% for 36 months, i.e. you will pay $6,000 up front and then $1,500 a month for the following 3 years, beginning next month (a total amount of $60,000). • Alternatively, they will give you a $4,000 discount on a cash purchase. You have sufficient cash in your savings account, which is earning 5% p.a., to pay cash for the car. State whether you would prefer to pay cash for the car or take up the attractive financing offer? Support your answer with workings and explanations as necessary. (20 Marks) You may complete this section using either excel or a calculator. In either case you should clearly show your all workings/calculations. Answers without workings may not be awarded full marks.

Answer 1

Option A: Present value of total payments
Using financial calculator
PMT=-1500
N=12*3
I/Y=5%/12
FV=0
CPT PV=50048.55

Present value=present value of monthly payment+downpayment=50048.55+6000=56048.55

Option B:
PV=60000-4000=56000

As we see that total present value in Option B is lower, choose Option B i.e., pay cash for the car