K.Mautos-
Interest rate = 10% per year = 10%/12 = 0.83% per month
We will discount each month's payment by dividing amount to be
paid ($3500) by (1+0.83%)^n {n is no.of month).
Following excel shows amount, which is derived by dividing
payment by discount factor. Discount factor =(1+0.83%)^n {n is
no.of month).
|
Months |
Payment |
Discount Factor |
Amount |
| 0 |
20000 |
|
|
| 1 |
3500 |
1.008 |
3471.189 |
| 2 |
3500 |
1.017 |
3442.615 |
| 3 |
3500 |
1.025 |
3414.277 |
| 4 |
3500 |
1.034 |
3386.172 |
| 5 |
3500 |
1.042 |
3358.298 |
| 6 |
3500 |
1.051 |
3330.653 |
| 7 |
3500 |
1.060 |
3303.237 |
| 8 |
3500 |
1.068 |
3276.045 |
| 9 |
3500 |
1.077 |
3249.078 |
| 10 |
3500 |
1.086 |
3222.333 |
| 11 |
3500 |
1.095 |
3195.807 |
| 12 |
3500 |
1.104 |
3169.501 |
| 13 |
3500 |
1.113 |
3143.41 |
| 14 |
3500 |
1.123 |
3117.535 |
| 15 |
3500 |
1.132 |
3091.872 |
| 16 |
3500 |
1.141 |
3066.421 |
| 17 |
3500 |
1.151 |
3041.179 |
| 18 |
3500 |
1.160 |
3016.145 |
| 19 |
3500 |
1.170 |
2991.317 |
| 20 |
3500 |
1.180 |
2966.694 |
| 21 |
3500 |
1.190 |
2942.273 |
| 22 |
3500 |
1.199 |
2918.053 |
| 23 |
3500 |
1.209 |
2894.032 |
| 24 |
3500 |
1.219 |
2870.21 |
| 25 |
3500 |
1.230 |
2846.583 |
| 26 |
3500 |
1.240 |
2823.151 |
| 27 |
3500 |
1.250 |
2799.912 |
| 28 |
3500 |
1.260 |
2776.864 |
| 29 |
3500 |
1.271 |
2754.005 |
| 30 |
3500 |
1.281 |
2731.335 |
Sum of all payments = 20,000 + 92,610 (sum of all payments
discounted of 30 months) = $112,610
Lemon Motors- Payment to be made = 110,000 - 1000 =
$109,000
So, Lemon Motors is better option.
