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    Financing Options

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    You are considering the purchase of a new car. The choices are:
    A. Pay $27,500 cash, or
    B. Pay $650 a month for 4 years, with an up-front service fee of $500, or
    C. Pay $750 a month for 3 years plus a balloon payment of $5,000.
    What are the implied interest rates in financing arrangements B and C?

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    Solution Preview

    Please see the attached file.

    From option A (pay $27,500 cash) we know that the value of the car is $27,500 and that the present value of option B and C should also equal $27,500. In other words the choice of financing does not influence the value of the car and thus all financing options have the same present value of $27,500.

    In both options B and C we have to use the following formula to ...

    Solution Summary

    This solution analyzes financing options available in purchasing a car.