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    Car Loan Time Value of Money

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    DISCOUNT RATE IS: 10%

    1) Buy car for $35,000. If bank will lend $30,000 (10% discount rate), what will annual payments be? Make 1st payment at end of year and make 5th and final payment at end of 5th year. SHOW IN EXCEL WITH "PAYMENT" FUNCTION

    2) If payments were monthly, instead of annual, what would monthly car payment be? The first payment will be at the end of the month and the last payment will be at the end of the 60th month. Are the monthly payments 1/12th of your annual payments? Why or why not? SHOW IN EXCEL

    3) Dealer offers to sell you car for $33,000 ($2,000 cash back) or charge you $35,000 and lend you $30,000 of the purchase price at 9%. Thus will make a $5,000 down payment and the annual payments based on a 9% rate or you will make a $3,000 down payment and make the five annual payments you solved for above (ie: loan payments based on 10% rate). How much cheaper is the discounted financing option? If it is more expensive, enter your answer as a negative number. Assume that the correct discount is still 10% when you value the two loans. SHOW IN EXCEL

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    Solution Summary

    The solution is provided in excel showing the difference between monthly and annual payments. The discount rate is 10%.

    $2.19