Time Value of Money
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1) You are considering buying an expensive Fancycar MSRP $99,000. The dealer has offered you 2 alternatives for purchasing the car:
a. You buy the car for $90,000 I cash and get a $9,000 discount
b. You can buy the car for $99,000 with a down payment of $39,000. The balance is a zero interest loan to be paid back in 36 equal installments.
Alternatively, your bank is willing to give you a car loan at an annual rate of 10%. Decide how to finance the car: bank loan, zero percent interest loan with the dealer or cash payment.
2) Michael is considering his consumption habits, trying to figure out how to save money. He realizes that he could save $2 every day by ordering regular coffee instead of a lattee at the coffee store. Because he buys coffee every work day, this works out to $10 per week, which amounts to a savings of $520 per year.
a. If Michael is 25 today and retires at age 65, how much will he have accumulated from savings on coffee versus latte? Assume that the interest rate is 4% and that the $520 savings occur at the end of each year.
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