You are buying a new $20,000 car and have the option to pay for the car with a 0% loan or to receive $500 cash back at the time of the purchase. With the loan, you pay $5,000 down when you purchase the car and then make three $5,000 payments, one at the end of each year of the loan. You currently have $50,000 in your savings account.
a. The rate of interest on your savings account is 4% and will remain so for the next three years. Which payment method should you choose?
b. What interest rate, i, makes you indifferent between the two payment methods?