6. Suppose Hassan decides to explore the costs of financing a more expensive vehicle. The more expensive vehicle costs $34,900 in total and qualifies for the 3.9% dealer financing for 48 months or $2500 cash back. What is the highest effective annual rate of interest at which Hassan should borrow from the bank instead of using the dealer's 3.9% financing?
6. Suppose Hassan decides to explore the costs of financing a more expensive vehicle. The more expensive vehicle costs $34,900 in total and qualifies for the 3.9% dealer financing for 48 months or $2500 cash back. What is the highest effective annual rate of interest at which Hassan should borrow from the bank instead of using the dealer's 3.9% financing?
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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Transcribed Image Text:6. Suppose Hassan decides to explore the costs of financing a more expensive vehicle. The
more expensive vehicle costs $34,900 in total and qualifies for the 3.9% dealer financing for
48 months or $2500 cash back. What is the highest effective annual rate of interest at
which Hassan should borrow from the bank instead of using the dealer's 3.9% financing?
Hassan's wife Dana also needs a car. While reading the newspaper, she notices an ad for an
Acura TSX She thinks that it is her ideal vehicle.
The ad quotes both a cash purchase price of $37,500 and a monthly lease payment option.
Since she does not have enough money to pay cash for a car, she would have to finance it from
Honda by paying interest of 5.9% compounded monthly on a loan.
The lease option requires payments of $594 a month for 48 months with a $1,330 down
payment or equivalent trade. Freight and air tax are included. Dana does not have a vehicle to
offer as a trade-in. If the vehicle is leased, then after 48 months it could be purchased for
$16,155. The lease purchase would be based on an interest rate of 3.89%. During the term of
the lease, kilometres are limited to 24,000 per year, with an additional charge of $0.08 per
kilometre for excess kilometres. The costs include freight and air tax, but exclude taxes,
registration. licence, and dealer administration charges. Dana is particularly impressed with the
four years or 100,000 kilometre" warranty on the engine and transmission. The manufacturer
also offers 24-hour roadside assistance.
Dana must decide whether to buy or lease this car. She lives in a province with a 13% HST tax
rate. She realizes that the costs of licence and insurance must be paid. but she will ignore these
in her calculations.
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