Question

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 $570 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 $17,093, 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:**

**Option 1:**

Monthly Payment = $570

Lump Sum Payment = $12,000

Number of Payment = 25

Annual Interest Rate = 24%

Monthly Interest Rate = 24% / 12

Monthly Interest Rate = 2%

Present Value = $570 * PVA of $1 (2%, 25) + $12,000 * PV of $1
(2%, 25)

Present Value = $570 * 19.523 + $12,000 * 0.610

Present Value = $18,448.11

**Option 2:**

Lumpsum payment today = $17,093

**Answer 1-b:**

In present value terms, Option 1 is better as its present value is higher than present value of Option 2.

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