You can buy a car that is advertised for $26,400 on the following terms: (a) pay

Question

You can buy a car that is advertised for $26,400 on the following terms: (a) pay $26,400 and receive a $6,400 rebate from the manufacturer; (b) pay $440 a month for 5 years for total payments of $26,400, implying zero percent financing. a. Calculate the present value of the payments for option (a), if the interest rate is 1.25% per month. b. Calculate the present value of the payments for option (b), if the interest rate is 1.25% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

a)

Present value of payment:

= $26,400-$6,400

= $20,000

b)

Present value of payments P×[1-(1÷(1+r)^n)]÷r Here, 1 Interest rate per annum 15.00% 2 Number of years                                                                 5 3 Number of compoundings per per annum                                                               12 4 = 1÷3 Interest rate per period ( r) 1.25% 5 = 2×3 Number of periods (n) 60 Payment per period (P) $                                                        440 Present value of payments $                                            18,495.22 440*[1-(1/(1+1.25%)^60)]/1.25%

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