Finance Ch5.3

# Finance Ch5.3 - 22 You are in the process of purchasing a...

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Unformatted text preview: 22} You are in the process of purchasing a new automobile that will cost you \$25,000. The dealership is offering you either a \$1,000 rebate (applied toward the purchase price} or 3. 9% financing for 60 months (with payments made at the end of the month). You have been pre—approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the \$2000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3. 9% APR? Answer: Take the rebatel Credit Union: First we need the monthly interest rate = APR f k = .075! 12 = .00625 or 625%. Now: P V = 24000 (rebate 25,000 — 1,000) I = .625 FV = 0 N = 60 Compute PMT = \$480.91 Dealership: First we need the monthly interest rate 2 APR 1? k = .039! 12 = .00325 or 325%. Now: PV 2 25000 (no rebate} I = .325 FV2 0 N = 60 Compute PM = \$459.29 Since 459.29 ‘1 480.91, go with the dealership and forgo the rebate. 23) You are purchasing a new home and need to borrow \$325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6. 5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month}. The mortgage lender also tells you that if you are willing to pay 1 point, they can offer you a lower rate of 6. 25% APR for a 30—year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional \$3250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early}, are you better off paying the 1 point and borrowing at 6. 25% APR or just taking out the loan at 6.5% without any points? Since payments with points are \$2,032 01 <5 payments with no points are \$2,066.22, then pay the points Since payments with points are \$2,031.01 > payments with no points are \$2,014.22, then do not pay the points Since payments with points are \$2,021.01 <5 payments with no points are \$2,054.22, then pay the points Since payments with points are \$2,111.11 > payments with no points are \$2,054.22, then do not pay the points ...
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