Answer:
A. $20,000
B. $17,234.18
C.Option (b)
Explanation:
Obviously, the option with lower Present Value would be the best option to buy the car. The Present Value of the options can find out as following
REQUIREMENT A
Price of car = $24,600
Rebate = $4,600
Present value of the payments for option = Price of the car – rebate
Present value of the payments for option (a) = $24,600 - $4,600
Present value of the payments for option = $20,000
REQUIREMENT B
We can use the following Present Value of an Annuity formula to calculate the present value of the payments
PV of the payments for option = PMT * [1-(1+i) ^-n)]/i
PV of the payments for option (b) (PV) =?
Monthly payment PMT =$410 per month
Number of payments n = 5 years *12 months = 60
Monthly interest rate i=1.25% per month or 0.0125
PV of the payments for option = $410 x [1- (1+0.0125) ^-60]/0.0125
PV of the payments for option = $17,234.18
REQUIREMENT C.
Which is the better deal?
Option (b) is better deal as the present value of payments ($17,234.18) is less than Present value of the payments for option (a); $20,000.
