You can buy a car that is advertised for $14,400 on the following terms: (a) pay

Question

You can buy a car that is advertised for $14,400 on the following terms: (a) pay $14,400 and receive a $2,400 rebate from the manufacturer; (b) pay $400 a month for 3 years for total payments of $14,400, implying zero percent financing.

a. Calculate the present value of the payments for option (a) if the interest rate is .75% per month.

Present Value _____________

b. Calculate the present value of the payments for option (b) if the interest rate is .75% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Present Value _______________

Explanation / Answer

Part A:

PV of Cash flow = cash Paid - rebate received

= $ 14,400 - $ 2400

= $ 12,000

As the cash flows are happened at period "0", discounting is not required.

Part B:

PV of Cash flows = Cash flow * PVAF ( r%, n periods)

PVAF = sum of PVF(r%, n peiods)

PV of Cash flows = Cash flow * PVAF ( r%, n periods)

= $ 400 * 31.4468

= $ 12,578.72

Pls comment, if any further assistance is required.

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