You are about to purchase a new car from a dealer who has a new and un

You are about to purchase a new car from a dealer who has a new and unusual payment plan. You have the choice to pay $28,000 cash today or $31,000 in four years.

If you have the opportunity to borrow the cash price value of the car at a rate of 2.5% and repay the loan in a lump sum in 4 years, which option should you take and why?
A) Pay the $31,000 in the future because it it always better to delay payment for new assets.
B) Pay the $31,000 in the future because the PV is less than $28,000 today.
C) Pay the $28,000 cash today even if you need to borrow the money because the FV of the repayment in 4 years is only $30,906.76.
D) Pay the $28,000 cash today because you pay a full $3,000 less than if you wait and pay the other option as presented.

ANSWER

C
Explanation: C) FV = PV(1 + r)^n = $28,000 * (1.025 )^4 = $30,906.76.