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The following ad was placed by a used car dealer in town. $1,500 down + $99 for first 36 months +...

Question:

The following ad was placed by a used car dealer in town:

$1,500 down + $99 for first 36 months + $199 for 36 months.

What is the price of the car if the interest rate is 12% per year?

A. $2,339

B. $10,945

C. $7,168

D. $8,668

Dealer financing:

Dealer financing is an add-on service provided by retailers to offer easy purchase option to its customers. The retailers offer loan services to purchase the product and hand over it to bank after processing.

Answer and Explanation:

The correct option is D, $8,668

Computation of cost of the car:

Particulars Amount ($)
Down payment 1,500
Monthly installments for first 36 months 99
Present value of monthly installments for first 36 months (PVIFA(99,1%,36 months) 2,980.6425
Monthly installments for next 36 months 199
Present value of monthly installments for next 36 months (PVIFA(199,1%,72 months) - PVIFA(199,1%,36 months) 4187.5371
Cost of the car (Sum of down-payment and PVIFA of monthly installments) 8,668.1796

Table (1)

Therefore, the total cost of the car is $8,668.

Note:

Interest rate is 12% per year.

Interest rate per month is (12 divided by 12) 1%.

Present value is calculated by draw8ing the interest factor from the PVIFA table.


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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