The answer to this problem is provided above, but can someone explain the intuition behind these results? I am confused because the interest rate of 2% for part A is an opportunity cost, while the interest rate for part B is a cost of capital. I do not understand why these are treated as the same variable in these two cases even though they each have different implications. The fact that the credit card financed at 15% interest offers a better present value alternative appears to be very counter intuitive to me. I need some help with this intuition! It is the same intuition as is displayed in the graph below.. It does not make sense to me why $100 at 15% in 20 years has a lower present value than $100 at 5% in 20 years.

10. Two dealers compete to sell you a new Hummer with a list price of $45,000. Dealer C offers to sell it for $40,000 cash. Dealer F offers 0-percent financing:" 48 monthly payments of $937.50. (48x937.50=45,000) (a) You can finance purchase by withdrawals from a money market fund yielding 2% per year. Which deal is better? (b) You always carry unpaid credit card balances charging interest at 15% per year. Which deal is better? 10. (a) Cash option PV = $40,000 1 $43, 228 (1.02(1/125) 48 Financing option PV 2% = 937.5 1.021712-I * Cash option costs less (b) Cash option PV = $40,000 Financing option 15% = 937.5 x 1.151712_1 1 1 1 = $34, 271 48 (1.15(1/12))* Cash option costs more FIGURE 2.2 110 100 90 Present value of a future cash flow of $100. Notice that the longer you have to wait for your money, the less it is worth today. 80 r= 0% = 5% 10% r = 15% 70 60 Present value of $100, dollars 50 40 30 20 10 1 0 2 4 6 14 16 18 20 8 10 12 Number of years