A finance manager employed by an automobile dealership believes that the number

Question

A finance manager employed by an automobile dealership believes that the number of cars sold in his local market can be predicted by the interest rate charged for a loan. Interest Rate (%) Number of Cars Sold (100s) 3 10 5 7 6 5 8 2 The finance manager performed a regression analysis of the number of cars sold and interest rates using the sample of data above. Shown below is a portion of the regression output. Regression Statistics Multiple R 0.998868 R2 0.997738 Coefficient Intercept 14.88462 Interest Rate -1.61538 Are there factors other than interest rate charged for a loan that the finance manager should consider in predicting future car sales? Is interest rate charged for a loan the most important factor to be considered in predicting future car sales? Explain your reasoning.The dealership’s vice-president of marketing has requested a sales forecast at the prevailing interest rate of 7%. As finance manager, what reasons would you convey to the vice-president in recommending this forecasting model? Is the prediction of car sales at 7% a reflection of the current downturn in the economy? How might this impact the dealership’s business? For additional details, please refer to the Scenario Analysis Guidelines and Rubric document in the Assignment Guidelines and Rubrics section of the course.

Explanation / Answer

Answer

Answer 1

Are there factors other than interest rate charged for a loan that the finance manager should consider in predicting future car sales?

Apart from interest rates charged on loan, GDP Growth rate of country, Per capita income of the country, Demographics of country, disposable income of the people, Spending habits of people, Research and development, Market size , Competition in automobile and dealership industry, Prices of Raw materials, Technology, Customer preferences should be considered in predicting future car sales.

Answer 2

Is interest rate charged for a loan the most important factor to be considered in predicting future car sales? Explain your reasoning.

Yes, Interest rate charged for a loan is one of the most important factor to be considered in predicting future car sales because when interest rates are low, Customers get easy and cheaper credit to purchase the cars. These will enable most customers to buy cars at lower cost which will increase demand for car and sales revenue of the company. On other hand, If interest rates are high, cost of loan to buy car will be higher and very few people will be able to afford it and this will decrease the demand for cars in market and ultimately reduction in sales of the company.

Answer 3

The dealership’s vice-president of marketing has requested a sales forecast at the prevailing interest rate of 7%. As finance manager, what reasons would you convey to the vice-president in recommending this forecasting model?

As Finance manager, you should convey dealership’s vice-president of marketing to consider other factors like GDP Growth rate of country, Per capita income of the country, Demographics of country, disposable income of the people, Spending habits of people, Research and development, Market size , Competition in automobile and dealership industry, Prices of Raw materials, Technology, Customer preferences in sales forecast model apart from prevailing interest rates Which will give more reliable sales forecast figures.

Answer 4

Is the prediction of car sales at 7% a reflection of the current downturn in the economy? How might this impact the dealership’s business?

No, the prediction of car sales at 7% is not necessarily a reflection of the current downturn in the economy. Decrease in the car sales may due to change in other factors like Demographics of country, Spending habits of people, Research and development, Market size , Competition in automobile and dealership industry, Prices of Raw materials, Technology, Customer preferences. This may decrease sales revenue of dealership’s business of the company even if economy is stable .

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