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Payment option should Greg accept

Greg Miller wants to buy a new automobile. The dealer has the exact car Greg wants, and has given Greg two payments options: (1) pay the full cash price of $19,326 today, or (2) pay only $2,000 down today and then make four more annual payments of $5,000 each beginning one year from today. Greg doesn't have the cash needed to pay the fill price of the car, but he does have enough for the down payment. He can also obtain an automobile loan from his bank at 5% interest per year.

Required

1. Verify that the imputed interest rate on the dealer's loan is 6%. That is, show that the present value of Greg's payment equals $19,326 (rounded to the nearest dollar) when discounted at 6%.

2. Which payment option should Greg accept?

Solution Preview

Greg Miller wants to buy a new automobile. The dealer has the exact car Greg wants, and has given Greg two payments options: (1) pay the full cash price of $19,326 today, or (2) pay only ...

Solution Summary

This provides the steps to calculate and evaluation all the payment options

$2.19