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Online Car Buying and Time Value of Money

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With a click of the mouse, Mackenzie enters the auto "showroom." In the past few months she had realized that the repair costs for her 11-year-old car were accelerating. She thought it was time to start shopping for a new car online and decided to start her Internet search for a vehicle by looking at a small and mid-sized SUV's. Her friend suggested that Mackenzie research more than one type of vehicle. They reminded her that comparable models were available from various auto manufacturers.
In her online car buying process, Mackenzie next did a price comparison. She obtained more than one price quote by using various online sources. She then prepared an overview of her online car buying experiences.
Mackenzie's next step was to make her final decision. After selecting what she planned to buy, she finalized the purchase online and decided to take delivery at a local dealer.
In recent years, less than 5 percent of car buyers have actually purchased vehicles over the Internet. That number is increasing; however, car buying experts strongly recommend that you make a personal examination of the vehicle before taking delivery.

1. Based on Mackenzie's experience, what benefits and drawbacks are associated with online car buying?
2. What additional actions might Mackenzie consider before buying a motor vehicle?
3. What do you consider to be the benefits and drawbacks of shopping online for motor vehicles and other items?

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1. Based on Mackenzie's experience, what benefits and drawbacks are associated with online car buying?
Browsing the internet and comparing prices is a very good starting point. For example, in Canada, people generally start this process by visiting www.canadianblackbook.com. Mackenzie really took the right step.
No pressuring sales teams - Most of the time, car sales people earn a discount when they are able to sell a car to a customer. Mackenzie's decision to compare various prices online gives her the option of buying a car without haggling and dealing with pressure from sales people.
Saving Time: In terms of saving time, Mackenzie saves a lot of time when compared to driving around town and dealing with traffic and negotiation times with sales people. Also, there is 24/7 access and more flexibility in customization of the car.
Lastly, Mackenzie could save some money - online dealerships have multiple offers and different varieties across ...

Solution Summary

The advantages and disadvantages of buying a car online considering the time value of money.

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b. normal when it slopes upward to the right
c. a plot of interest rates versus term, also called the term structure of interest rates
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51. The federal government can always avoid default on its issues because of its unique right to:
a. change Treasury bond yields to zero at its
c. tax.
b. print money. d. wage war.

52. Which exchange does not have a physical location?
a. New York Stock Exchange (NYSE)
b. American Stock Exchange (AMEX)
c. National Association of Securities Dealers Automated Quotation System (NASDAQ)
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53. Which of the following statements about time lines is false?
a. A time line is a graphic portrayal of a time value problem.
b. Time zero is the present point in time.
c. Future time periods are to the right of zero.
d. Time is portrayed along a vertical line.

54. The higher the rate of interest:
a. the larger the present value of a future sum of money
b. the smaller the future value of an amount invested today
c. the smaller the present value of a future sum of money
d. all of the above

55. The process of finding present values is frequently called
a. annualizing c. discounting
b. compounding d. leasing
56. If the interest rate is 0%,
a. future amounts have zero present value.
b. future amounts have an infinite present value.
c. the present value of amounts to be received in the future is equal to the sum of those
d. the future value of an investment is less than the sum of its cash flows.

57. Which of the following would increase the future value of an amount?
a. an increase in the interest rate
b. an increase in the amount
c. an increase in the time until future value is to be received
d. a and b
e. all of the above

58. Opportunity cost is the:
a. benefit that would have been available from the next best use of money.
b. prime rate for large firms.
c. unemployment rate.
d. rate on standard savings accounts.

59. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases.
a. it will be worth less c. it will not change
b. it will be worth more d. none of the above

60. Assume that you have just won $5,000,000 in the lottery and will receive $250,000 per year for the next 20 years. How much is your prize worth today if the interest rate is 8%?
a. $1,072,731 c. $2,185,219
b. $2,454,525 d. $1,165,250

61. You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and you wish to pay for the car over a 5-yearperiod, what are your monthly car payments?
a. $216.67 d. $285.78
b. $252.34 e. $318.71
c. $276.21

62. You want to purchase a car for $40,000 when you graduate in two years. At that time you will take out a 5-year bank loan at 12% compounded monthly. Based on your estimated earnings, you think you'll be able to afford loan payments of $750 per month. You plan to save up the difference between the cost of the car and the amount you'll borrow by making quarterly deposits over the next two years in a bank account that pays 8% compounded quarterly. How large must those deposits be? (Round to the nearest dollar)
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