Auto dealers have recently been offering "zero percent" financing. A typical plan offers a potential auto buyer the alternative between choosing a...

Auto dealers have recently been offering "zero percent" financing. A typical plan offers

a potential auto buyer the alternative between choosing a zero percent loan and a rebate on the

car price.

Here's the way a typical loan works: Josephine Autobuyer is interested in buying a

$20,000 car. The dealer offers Josephine two alternatives:

• She can pay the full manufacturer's suggested retail price (MSRP) of $20,000 and get a

five-year loan at zero percent loan. There are 60 monthly payments on the loan of

20,000 333.33

60

= ; the loan's first payment is at the time of the car purchase.

• Josephine can get a $3,000 rebate on the MSRP. In this case, however, she will have to

finance the car at the market interest rate. Current rates on 60-month car loans are 5.9%;

the monthly rate charged on such a loan is 5.9% 0.492%

12

= . A 60-month car loan rate

has payments in month 0 (the time of purchase), and months 1, 2, ... , 59.

Your assignment

1. Analyze the two alternatives; which is preferred? Use the following template:

And also if you could explain this as you would put it in a calculator that would be so helpful.