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?
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:
|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|
Therefore, the total cost of the car is $8,668.
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.
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Learn more about this topic:
from Corporate Finance: Help & ReviewChapter 8 / Lesson 7