Question
Diana is considering borrowing $10,500 to purchase a new compact SUV valued at $45,500 drive away. Diana has been offered a tradein value of $35,000
Diana is considering borrowing $10,500 to purchase a new compact SUV valued at $45,500 drive away. Diana has been offered a tradein value of $35,000 on her current vehicle. She believes that, with the lower registration, insurance, servicing and fuel costs of a new, smaller vehicle, she will save approximately $965 a year on her vehicle operation expenses over each of the next 7 years. Diana has been looking at the finance contracts available to her from alternative banks and credit unions. Option A: 3 year loan with end of month repayments of $350, Option B: 2 year loan with end of month repayments of $500 Option C: 3 year loan with end of quarter repayments of $1,050. Required: (a) Is it sufficient to either simply add up the total payments for each alternative or to see which has the lowest regular payment? If not, on what financial basis should Diana seek to differentiate and select between the different finance options? (4 marks) (b) Advise Diana as to the preferred finance alternative. (Hint: you can calculate the effective rate of interest for each financing option.) (12 marks) Note: You should provide appropriate all workings of calculations to support your answer and state any assumptions that you have made in developing your estimates and recommendations.
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