The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 8 percent interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.

Question

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Using a financial calculator or spreadsheet, we can calculate the present value of the monthly payments to be $19,479.36. To have the same present value, the down payment would be $25,000 - $19,479.36 = $5,520.64. Therefore, the appropriate down payment would be $5,520.64. This is the best choice because it has the lowest down payment and results in the lowest total cost of the car when factoring in the interest paid on the loan.

The Salesperson Offers, "Buy This New Car for $25,000 Cash