Question

On Jan. 1, 2019, Springer Co. decided to purchase a new 2019 Nissan Armada.  After negotiations with the dealership, they offered Springer the vehicle for $52,000 less a $3,000 discount, for a net price of $49,000.  The dealership will allow Springer to finance the entire $49,000 at an annual interest rate of 4.99% for 48 months.  Alternatively, they can offer a zero percent interest rate in lieu of the $3,000 discount for a 60 month loan (i.e., the cost of the car under this option is $52,000).

Required:  Using time value of money to justify your answer, which is the best option?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Alternative 1) 4.99 % interest rate for 48 months The present value of future installments will be cost of car after discount that is = $49000 Alternative 2) No discount no discount for 60 months Monthly Payment = 52000/60 = $ 866.67 2 Present value of monthly payments 5 = $866.67*((1-(1+(4.99%/12))^-60)/(4.99%/12)) 5 = 866.67*53.00357 53.00357 = = $ 45936.43 Since present value of cash outflow is less in alternative 2) so this alternative is better Since the present value of cash outflow is less in Alternative 2) that is no discount and 60 months term is better