Question

You need a new car and the dealer has offered you a price of $20,000, with the following payment options: (a) pay cash and receive a $2,000 rebate, or (b) pay a $5,000 down payment and finance the rest with a 0% APR loan over 30 months. But having just quit your job and started an MBA program, you are in debt and you expect to be in debt for at least the next 2 years. You plan to use credit cards to pay your expenses; luckily you have one with a low (fixed) rate of 15.00% APR. Which payment option is best for you? Your monthly discount rate is % (Round to four decimal places.)

Answer 1

Monthly discount rate = 15%/12 = 1.25%

Hence, present value of payments under loan = 5000 + 500*PVAF(1.25%, 30 periods)

= 5000 + 500*24.8889

= $17,444.45

Amount to be paid in cash = 20,000-2000 = $18,000

Hence, down payment of $5000 and rest with finance is the best option since lowest cost in terms of present value