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?
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 ...
This solution analyzes financing options available in purchasing a car.