Bob and Lisa must replace their old car as soon as possible.They have found a ne
ID: 2445598 • Letter: B
Question
Bob and Lisa must replace their old car as soon as possible.They have found a new one that meets their needs and havenegotiated a price of $24,500 with the dealer. The couple wishes tobuy a car by making a down payment of $2,000 and borrowing theremaining $22,500. The dealer offered to finance their purchasewith terms as follows:
Loanperiod 36 months
Annual interestrate 6%
Downpayment $2,000
Loanamount $22,500
Monthlypayment $684.49
Bob and Lisa were shocked by the amount of the monthly payment.The dealer told them not to worry because he could adjust the termsof the loan to fit their budget. Bob and Lisa would agree to buythe car if the payment is not more than $500 per month.
The dealer disappeared for a while and returned bearing goodnews. By increasing the loan period to 60 months, the payment would be only $500 per month. The dealerpresented the facts as follows:
Loan period 60months
Annual interestrate 6%
Downpayment $2,000
Monthlypayment $500.00
Bob and Lisa were delighted. They found the perfect car thatalso fit their budget.
A. Determine thesales price by calculating the present value of the payments usinga spreadsheet program. [Hint, determine the present value of themonthly payments using a term of 60 periods (60 months = 5years ×12 months) and the monthly interest bydividing the annual interest rate of 6% by 12 months (0.06 ÷12)].
B. Is thedealer’s behavior ethical?
C. Many types ofgoods are sold by salespersons who explain that the monthly paymentis only a certain amount each month. Explain how anunderstanding of present value techniques can help consumersdetermine whether such sales pitch is a fair deal.
Explanation / Answer
A. Using spread sheet function tocalculate Present Value Offer I Offer 2 Rate 6%/12 6%/12 Nper 36 60 Pmt -684.49 -500 PV $22,499.88 $25,862.78 If Bob and Lisa accept I offer thenthe selling price of car is $22,500. If they accept II offer itwill cost $25,862.78. Therefore they have to pay $3,362.90 more if theychoose II offer although monthly payment is less compare to Ioffer. B. No,his behaviour is not ethical, Dealerreduced the monthly payment but increase the time period. Therefore , he is getting $3,362.90extra. C. In accounting Time Value ofMoney indicates a relationship between timeand money-that a dollar received today is worth more than a dollar promised at sometime in the Future. It is because of the opportunity to investtoday’s dollar and receive interest on theinvestment. When deciding among Investment or Borrowingalternatives, it is essential to be able to compare today’sdollar and tomorrow’s dollar. Investors do that by usingthe concept of Presnt value and Future value. I hope it will help you.
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