Two alternatives are being considered to finance the acquisition of a

QUESTION

Two alternatives are being considered to finance the acquisition of a new vehicle. The purchase price is assumed $20,000 for all scenarios. (no discount for “cash” purchase). The investors minimum rate of return is a nominal 10.0% compounded monthly.Alternative A is to accept the dealer finance pac
Flat rate: Total cost = $20,000 Flat interest rate = 10% Flat interest per year = 20000 *10% = $2000 Interest per month = 2000 / 12 = 166.67 Monthly principle repayment = 20000 / 36 = 555.55 Total payment per month = Principle Interest = 555.55 166.67 = $722.22 Total repayment = 722.22 * 36 = $26,000 Compound rate: A = P(1 r/q)^nq P = Principal Amount r = Annual rate of interest n = Number of years A = How

uch money you have accumulated q = Number of times in a year A = 20000(1 (10%/12))^36 Total repayment = $26,964 Monthly repayment = 26,964 / 36 = $749 Here Flat compounding interest is better to reduce additional cost. We can save $26.78 (749 722.22) of cost.Thank you.

ANSWER:

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