Question

You want to purchase a brand new Electric vehicle that costs $ 50,000. Dealer A offers you the car for a cash purchase immediately if you pay only $ 45,000. Dealer B offers you a no cost EMI of $ 1000 for 50 months.

a. Suppose you can purchase it by withdrawing from an investment you already invested in that yields 5% yearly, what option would you choose?

b. Suppose you can purchase it using your credit card, and unpaid credit card balances are charged 17% interest per year, what option would you choose?

Answer 1

the MORE Benificial is the LESS Payable (outlay) in terms of PRESENT VALUES (PV) b. a. PV of payments to Dealer B PV = MONTHLY * 1- (1+INTEREST RATE/12)^(-MONTHS) PAYMENT INTEREST RATE/12 PV = $1,000 * 1 - (1+(0.05/12) )^(-50) 0.05/12 [ [ [ PV of payments to Dealer B PV = MONTHLY * 1 - (1+ INTEREST RATE/12)^(-MONTHS) PAYMENT INTEREST RATE/12 PV = $1,000 * 1-(1+ (0.17/12) )^(-50) 0.17/12 - ] -] ] ] PV = $1,000 * 45.05091607920 PV = $1,000 * 35.65283564820 PV = $45,050.9161 ALMOST $45,051 PV = $ 35,652.8356 ALMOST $ 35,5650 since, the present values are almost equal therefore, you can choose any dealer as it will not affect your outlay since, the present values are much lower therefore, it is advised to BUY from DEALER -B as it will lower your outlay

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