You’re looking to buy a new 2022 BMW with popular options at a price of $100,000. BMW is offering two great incentives to clear their 2022 inventory with the 2023 models rolling out. You only have the cash to pay taxes, title, license & fees and need to finance the car’s purchase price. You smartly researched your finance options and got pre-approval at a 4.9% APR (sounds like a sweet deal in today’s environment) for 60 months on your own so you’re not at the mercy of depending on financing from the car dealership. BMW is offering 2.9% APR financing for 60 months along with $1,500 cashback which would be used as a down payment that reduces the amount that you would need to finance or $2,500 cashback which you would also use as a down payment without the 2.9% financing. The BMW dealer is also willing to match your 4.9% APR pre-approved financing for 60 months if you select the $2,500 cashback option. Answer the following questions.

What is the effective annual rate of the 4.9% APR compounded monthly?

What would be your monthly car loan payment under the BMW’s 2.9% APR financing offer with $1500 cashback (assume a 60-month loan term)?

What would be your monthly car loan payment under the BMW’s $2,500 cashback offer and 4.9% APR financing (assume a 60-month loan term)?

At what APR would you be indifferent between the two offers? In other words, at what APR would you have the same monthly payment (assuming a 60-month loan term) for the $2,500 cashback offer as you would with the 2.9% APR financing offer with $1,500 cashback?

Answer rating: 100% (QA)

1 Effective Annual Rate EAR of the 49 APR compounded monthly To calculate the effective annual rate we use the formula EAR 1 APR nn 1 Where APR Annual ... View the full answer