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Loans - You need a new car and have decided to buy a Toyota Tundra. Fortunately,...

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Accounting

Loans - You need a new car and have decided to buy a ToyotaTundra. Fortunately, you have a great credit rating and you haveyour choice of financing. The cost is $26,000 out of the door. Youhave $3,000 to put down for a down payment. You have two financeoptions and need to decide which one is the best.

Option 1 - You can choose 0% financing for 60 months. The loanamount is $23,000.

a. What is your monthly payment? (Hint: divide the loan amountby 60)

b. What is the total amount you will pay for the car? (Hint:Don't think too hard... it is just the amount of the loan.)

Option 2 - You can choose $2,000 cash back, instead of 0%financing from the dealer, and decide to receive financing fromyour local bank. You will need to borrow $21,000 at an interestrate of 2.75% for 60 months.

c. Create an amortization table and past the first 5-6 lines inyour word document.

d. What is your monthly payment?

e. What is the total amount you will pay for the car? (Add thepayment column.) (.5 points)

f. Which option is better? (.5 points)

Answer & Explanation Solved by verified expert
4.3 Ratings (568 Votes)

Solution:

OPTION 1:

1. Monthly payment for 0% loan = 23000/60 = 383.33

2. Total Amount = 383.33*60 = $23,000

OPTION 2:

c.

Formula
Monthly Payments = Loan Amount / [1-1/(1+i)^n]/i
1+i 1.0023
(1+i)^n 1.1472
1/(1+i)^n 0.8717
1-1/(1+i)^n 0.1283
[1-1/(1+i)^n / i] 55.9979
Monthly Payments $375.01
Monthly Payments Principal Interest Balance
0 21000
1 $375.01 $326.89 $48.13 $20,673.11
2 $375.01 $327.64 $47.38 $20,345.47
3 $375.01 $328.39 $46.63 $20,017.08
4 $375.01 $329.14 $45.87 $19,687.94
5 $375.01 $329.90 $45.12 $19,358.05
6 $375.01 $330.65 $44.36 $19,027.39
7 $375.01 $331.41 $43.60 $18,695.99
8 $375.01 $332.17 $42.84 $18,363.82
9 $375.01 $332.93 $42.08 $18,030.89
10 $375.01 $333.69 $41.32 $17,697.19
11 $375.01 $334.46 $40.56 $17,362.73
12 $375.01 $335.22 $39.79 $17,027.51

d. Monhlty Payment = $375.01

e. Total Amount paid = $375.01*60 = $22500.84

f. Option B is better as we end up paying lesser monthly payments. The total amount paid is also lesser by $500.
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