You can buy a car that is advertised for $15,000 on the following terms: (a) pay...
You can buy a car that is advertised for $15,000 on the following terms: (a) pay $15,000 and receive a $2,000 rebate from the manufacturer; or (b) pay $300 a month for 48 months. Which is the better deal if the interest rate is 6 percent per year and why?
Homework Answers
We need to compare the PV of two options:
a) PV = $15000 - $2000 = $13000
b) We need to use PV of an annuity option to compute this
r = 6%/12 = 0.50% (monthly) ; n = 48 months
PV = 300 * 42.58
PV = $12,774.10
Since the PV of option 2 is less, that is a better deal.
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