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28 Sep 2019
Two alternatives are being considered to finance the acquisition ofa new vehicle. The purchase price is assumed $20,000 for allscenarios. (no discount for "cash" purchase). The investor'sminimum rate of return is a nominal 10.0% compounded monthly.
Alternative A is to accept the dealer finance package whichincludes a nominal 6.5% interest rate based on "add on" or "flat"compounding. A down payment equal to 20% of purchase price isrequired and the loan payments are spread out uniformly over months1-36.
Alternative B is to finance the acquisition through a bank at anannual percentage rate of 9% compounded monthly (normal compoundinterest). A down payment of 20% is required and the monthly loanpayments are uniform over the months 1 through 36.
1) Based on the monthly payments, which alternative would youselect?
2) Calculate the present worth cost @ i*=10% compounded monthly forA and B and compare with the $20,000 cash alternative.
I don't understand what the difference is between the minimum rateof return and the interest rates. And frankly don't know where tostart the calculations without that.
Two alternatives are being considered to finance the acquisition ofa new vehicle. The purchase price is assumed $20,000 for allscenarios. (no discount for "cash" purchase). The investor'sminimum rate of return is a nominal 10.0% compounded monthly.
Alternative A is to accept the dealer finance package whichincludes a nominal 6.5% interest rate based on "add on" or "flat"compounding. A down payment equal to 20% of purchase price isrequired and the loan payments are spread out uniformly over months1-36.
Alternative B is to finance the acquisition through a bank at anannual percentage rate of 9% compounded monthly (normal compoundinterest). A down payment of 20% is required and the monthly loanpayments are uniform over the months 1 through 36.
1) Based on the monthly payments, which alternative would youselect?
2) Calculate the present worth cost @ i*=10% compounded monthly forA and B and compare with the $20,000 cash alternative.
I don't understand what the difference is between the minimum rateof return and the interest rates. And frankly don't know where tostart the calculations without that.
Alternative A is to accept the dealer finance package whichincludes a nominal 6.5% interest rate based on "add on" or "flat"compounding. A down payment equal to 20% of purchase price isrequired and the loan payments are spread out uniformly over months1-36.
Alternative B is to finance the acquisition through a bank at anannual percentage rate of 9% compounded monthly (normal compoundinterest). A down payment of 20% is required and the monthly loanpayments are uniform over the months 1 through 36.
1) Based on the monthly payments, which alternative would youselect?
2) Calculate the present worth cost @ i*=10% compounded monthly forA and B and compare with the $20,000 cash alternative.
I don't understand what the difference is between the minimum rateof return and the interest rates. And frankly don't know where tostart the calculations without that.
Kelleb MloyiLv2
28 Sep 2019
