Adam has just graduated, and has a good job at a decent starting salary. He hopes to purchase his first new car. The car that Adam is considering costs $42,570 The dealer has given him three payment options: 1. Zero percent financing. Make a $7000 down payment from his savings and finance the remainder with a 0% APR loan for 48 months. Adam has more than enough cash for the down payment, thanks to generous graduation gifts. 2. Rebate with no money down. Receive a $3,500 rebate from the car dealer and finance the rest with a standard 48-month loan, with an 3.875% APR. He likes this option, as he could think of many other uses for the $7000 of his saving. 3. Pay cash. Get the $3,500 rebate and pay the rest with cash. While Adam doesn't have balance of the car cost in hand, he wants to evaluate this option. His parents always paid cash when they bought a family car; Adam wonders of this really was a good idea. 4. Suppose instead Adam has a lot of credit card debt, with an 28% APR, and he doubts he will pay off this debt completely before he pays off the car. What is Adam's best option now? (Hint: See Hint on #3 above) Adam's car purchase Car cost Loan Term in months Option 1 Down Payment Option 2 and 3 Rebate Option 2 Loan rate Deposit Interest Rates Student Loan Rate Credit Card Interest Rate $42,570 48 $7,000 $3,500 3.875% 0.75% 9.00% 28.00% Down Payment APR PV of Car Financing at Credit Card APR Question 4 (12 pts): Which option should he select? Option 1 Option 2 Option 3 Adam has just graduated, and has a good job at a decent starting salary. He hopes to purchase his first new car. The car that Adam is considering costs $42,570 The dealer has given him three payment options: 1. Zero percent financing. Make a $7000 down payment from his savings and finance the remainder with a 0% APR loan for 48 months. Adam has more than enough cash for the down payment, thanks to generous graduation gifts. 2. Rebate with no money down. Receive a $3,500 rebate from the car dealer and finance the rest with a standard 48-month loan, with an 3.875% APR. He likes this option, as he could think of many other uses for the $7000 of his saving. 3. Pay cash. Get the $3,500 rebate and pay the rest with cash. While Adam doesn't have balance of the car cost in hand, he wants to evaluate this option. His parents always paid cash when they bought a family car; Adam wonders of this really was a good idea. 4. Suppose instead Adam has a lot of credit card debt, with an 28% APR, and he doubts he will pay off this debt completely before he pays off the car. What is Adam's best option now? (Hint: See Hint on #3 above) Adam's car purchase Car cost Loan Term in months Option 1 Down Payment Option 2 and 3 Rebate Option 2 Loan rate Deposit Interest Rates Student Loan Rate Credit Card Interest Rate $42,570 48 $7,000 $3,500 3.875% 0.75% 9.00% 28.00% Down Payment APR PV of Car Financing at Credit Card APR Question 4 (12 pts): Which option should he select? Option 1 Option 2 Option 3
