2. A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?
2. A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem 2: Car Dealership Financing Offer**
A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?
A) $667
B) $1,333
C) $13,333
D) $14,000
**Explanation:**
To find the net present value (NPV), calculate the present value of the $14,000 that is due in one year, considering a 5% interest rate. Use the formula for present value:
\[ \text{NPV} = \frac{\text{Future Value}}{(1 + \text{interest rate})^n} \]
Where:
- Future Value = $14,000
- Interest rate = 5% or 0.05
- n = 1 year
This setup allows you to determine which option (A, B, C, or D) represents the car's current worth if the payment is deferred for a year at the given interest rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F12329165-83a7-4f90-ae4e-cd06099490e5%2F0cfaea63-85e2-4f67-82d7-ce6dd1d68cc4%2Fb3cvx3i_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem 2: Car Dealership Financing Offer**
A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?
A) $667
B) $1,333
C) $13,333
D) $14,000
**Explanation:**
To find the net present value (NPV), calculate the present value of the $14,000 that is due in one year, considering a 5% interest rate. Use the formula for present value:
\[ \text{NPV} = \frac{\text{Future Value}}{(1 + \text{interest rate})^n} \]
Where:
- Future Value = $14,000
- Interest rate = 5% or 0.05
- n = 1 year
This setup allows you to determine which option (A, B, C, or D) represents the car's current worth if the payment is deferred for a year at the given interest rate.
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