Question

Item8 10 points eBookPrintReferencesCheck my workCheck My Work button is now enabledItem 8 You have decided to buy a used car. The dealer has offered you two options: (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Pay $660 per month for 25 months and an additional $12,000 at the end of 25 months. The dealer is charging an annual interest rate of 24%. Make a one-time payment of $18,850, due when you purchase the car. 1-a. Determine how much cash the dealer would charge in option (a). (Round your answer to 2 decimal places.) 1-b. In present value terms, which offer is clearly a better deal

Answer 1

Answer:

1. a. $20,199.85

  b. One time payment of $18,850.

Explanation:

1. a. Find the present value of $660 per month (annuity) and $12,000 at the end of 25 months.

Period = 25 months

Interest = 24% / 12 months = 2%

Present value of annuity = 660 * ( 1 - (1 + 2%) ⁻²⁵) / 2%

= $12,885.48

Present value of $12,000 at end of 25 months.

= 12,000 / ( 1 + 2%)²⁵

= $7,314.37

Present value = 12,885.48 + 7,314.37

= $‭20,199.85‬

1.b. Making a one time payment of $18,850 is the better deal.