Adam has just graduated, and has a good job at a decent startingsalary. He hopes to purchase his first new car. The car that Adamis considering costs $39,000. The dealer has given him threepayment options:
1. Zero percent financing. Make a $2,500 down payment from hissavings and finance the remainder with a 0% APR loan for 48 months.Adam has more than enough cash for the down payment, thanks togenerous graduation gifts.
2. Rebate with no money down. Receive a $3,400 rebate from thecar dealer and finance the rest with a standard 48-month loan, withan 5% APR. He likes this option, as he could think of many otheruses for the $2,500 of his saving.
3. Pay cash. Get the $3,400 rebate and pay the rest with cash.While Adam doesn’t have $39,000, he wants to evaluate this option.His parents always paid cash when they bought a family car; Adamwonders if this really was a good idea.
1. What are the cash flows associated with each of Adam’s threecar financing options?
2. Suppose that, similar to his parents, Adam had plenty of cashin the bank so that he could easily afford to pay cash for the carwithout running into debt now or in the foreseeable future. If hiscash earns interest at a 5.4% APR (based on monthly compounding) atthe bank, what would be his best purchase option for the car?
