Question
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 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 $39,000. The dealer has given him three payment options:
1. Zero percent financing. Make a $2,500 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 $3,400 rebate from the car dealer and finance the rest with a standard 48-month loan, with an 5% APR. He likes this option, as he could think of many other uses for the $2,500 of his saving.
3. Pay cash. Get the $3,400 rebate and pay the rest with cash. While Adam doesnt have $39,000, he wants to evaluate this option. His parents always paid cash when they bought a family car; Adam wonders if this really was a good idea.
Questions:
3. In fact, Adam doesnt have sufficient cash to cover all his debts including his (substantial) student loans. The loans have a 10% APR, and any money spent on the car could not be used to pay down the loans. What is the best option for Adam now? (Hint: Note that having an extra $1 today saves Adam roughly $1.10 next year because he can pay down the student loans. So, 10% is Adams time value of money in this case.)
4. Suppose instead Adam has a lot of credit card debt, with an 18% APR, and he doubts he will pay off this debt completely before he pays off the car. What is Adams best option now?
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