22 Jul WHAT IS THE NET PRESENT VALUE OF THE LOAN TO YOU
You decide to buy a Bonda Discord Lx automobile. You have $4000 in cash. If you purchase the car (a Show more You decide to buy a Bonda Discord Lx automobile. You have $4000 in cash. If you purchase the car (at a price of $16000) you will spend all your cash in making a down payment. You can borrow the remaining at an interest rate of 10.5% on the outstanding balance. (i) Assume (for simplicity) that loan repayments have to be made annually and you pay $2000 every year. How long will it be before you pay off your loan? (ii) Suppose Bonda offers you a rate of 2.9% on your outstanding balance. How long would it take for you to repay the loan if you repaid $2000 every year? What is the net present value of the loan to you? As far as possible try to avoid using a spreadsheet to answer this question in an exam situation you would need to know how to apply the relevant formulas. (iii) Bonda offers to lease the Discord at $199 a month with no down payment. The car reverts to Bonda at the end of four years. Its resale value at that point is $9500. Are you better off leasing or buying the car and financing at 2.9%? How would your answer change if you estimate the resale value to be $7500. Show less
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