You are about to purchase a new car from a dealer who has a new and unusual payment plan.You have the choice to pay $28,000 cash today or $31,000 in four years.If you have the opportunity to borrow the cash price value of the car at a rate of 2.5% and repay the loan in a lump sum in 4 years,which option should you take and why?
A)Pay the $31,000 in the future because it it always better to delay payment for new assets.
B)Pay the $31,000 in the future because the PV is less than $28,000 today.
C)Pay the $28,000 cash today even if you need to borrow the money because the FV of the repayment in 4 years is only $30,906.76.
D)Pay the $28,000 cash today because you pay a full $3,000 less than if you wait and pay the other option as presented.

Question

Quizplus · Accepted Answer

Calculating the Future Value (FV) of borrowing $28,000 for 4 years at a rate of 2.5% using the formula FV = PV x (1 + r)^n, where PV is the present value, r is the interest rate per year, and n is the number of years:
FV = $28,000 x (1 + 0.025)^4
FV = $30,906.76

Comparing the FV of repaying the loan in 4 years ($30,906.76) to the option of paying $31,000 in 4 years, it is evident that paying $28,000 cash today is the better choice since it saves about $2,000. In addition, delaying payment may have additional costs such as interest, inflation, and uncertainty. Therefore, the best option is to pay $28,000 cash today even if you need to borrow the money.

You Are About to Purchase a New Car from a Dealer