You are buying a new car for $30,000 plus 5% taxes for a total cost of $31,500. You can pay cash for the entire amount by writing a check from your money market deposit account at the bank that currently pays 1.2% (annual, compounded monthly).

Part a: The finance manager says he can get you a special deal if you take out a loan: “All you have to do to qualify for a discount is to finance a minimum of $7,500 at 3.99% (annual, compounded monthly). You also cannot pay off the loan for at least 6 months.” How much would your loan payments be if you borrowed the minimum $7,500 and paid it off in equal installments over the next 6 months?

Part b: The finance manager says, “We’ll discount the price $500 if you take out this loan.” How much less would you pay for the car accounting for taxes? (This does not depend on the initial price of the car.)

Part c: Make a timeline for the loan and the price discount (including taxes on the price discount).

Part d: How much better or worse off are you today if you take the discount and the loan, making loan payments from your money market deposit account? Does the loan/discount deal make financial sense?

Answer rating: 100% (QA)

STE... View the full answer