Andy would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car.The current price of the car Andy wants to buy is $22,000,and the dealer expects the price of a similar new car to be $24,000 in two years.If Andy can earn an annual interest rate of 3% on his money,should he buy the car now or wait for two years? Why? Note: Storage costs if Andy purchases the car are $0.Please limit your considerations to the factors offered in the answer choices.
A)Buy now because if Andy invests the $22,000 today it will only increase in value to $23,340,and this is less than the cost of his desired new car in two years.
B)Andy is indifferent because his $22,000 investment will be worth exactly $24,000 after two years.
C)Buy in two years because at $24,000 the car will cost less than the $24,385 Andy will have after investing the money for two years.
D)Buy in two years because $24,000 is a real deal for the car Andy wants.

Question

Quizplus · Accepted Answer

If Andy invests $22,000 at a 3% annual interest rate, it will grow to $22,000 * (1.03)^2 = $23,340 in two years, which is less than the expected future price of $24,000. Therefore, he should buy the car now.

Andy Would Like to Buy a New Car but Must