Consider the following situation: A business owner needs a new truck to help his business grow. It costs $25,000 right now and the price is expected to rise about 10 percent compounded quarterly. How should he make this purchase if he can afford about $400 per month in payments for this truck and his income is expected to go up slowly? Here are two options:
He could buy the truck now. He could get $5000 as a trade-in on one of his current trucks. The financing of the balance would be at a rate of 16 percent compounded quarterly for a period of 3 years.
He could set up a sinking fund at a bank. The rate would be 12 percent compounded quarterly. (Note: when he buys the new truck in 3 years, the trade-in will be worth less and the new truck will probably cost more.)
Consider these questions as you make your decision:
Which approach is more affordable?
What are the comparative total costs of each of these two options?
What are the most important mathematical factors for the business owner to consider?
If the business owner had the cash, would he be better off buying the truck now without financing? Why or why not?
If they are applicable, you may also bring in your own business or personal experiences to support your decision.