Question

1. Ted found out that the rebate is not given until after he has

Answer 1

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Answer:

  maybe not

Step-by-step explanation:

Consider a couple of scenarios for a $20,000 car purchase and a $2000 rebate, with sales tax at 10%.

1) The rebate is applied directly to the purchase price.

  Taxable amount: $20,000 -2,000 = $18,000.

  Price with tax: $18,000 × 1.10 = $19,800

  Amount financed: $19,800.

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2) The rebate is given after the sale is complete.

  Taxable amount: $20,000

  Price with tax: $20,000 × 1.10 = $22,000

  Amount financed: $22,000

  Remaining loan balance if $2000 rebate is immediately applied to the loan: $22,000 -$2000 = $20,000

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If the loan is for 5 years at 3%, the payments and total costs are ...

  Scenario 1: Monthly payment $355.78;

     total cost of loan: 60×355.78 = 21,346.80

  Scenario 2: Monthly payment $395.31;

     total cost of loan: 55×395.31 = $21,742.05  (note there are fewer payments because of the initial payment to principal of $2000)

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Ted effectively has to finance an additional $200, equal to the sales tax on the rebate. So the delayed rebate costs him an extra $395.25 over the life of the loan.

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We have assumed certain tax and payment scenarios. If tax is not an issue, and if the loan terms are such that the rebate can be applied immediately to the loan amount, then there may be no difference in total cost, or the delayed rebate may result in a lower total cost due to the higher monthly payment.