Bob and Lisa must replace their old car as soon as possible. They have found a new one that meets their needs and have negotiated a price of 24,500 with the dealer. The couple wishes to buy the car by making a down payment of 2,000 and borrowing the remaining 22,500. The dealer offered to finance their purchase with terms as follows:
Loan Period 36 months
Annual Interest Rate 6%
Down Payment 2,000
LoanAmount 22,500
Monthly Payment 684.49
Bob and Lisa would agree to buy the car if the payment is nomore than 500 per month.
By increasing the the loan period the dealer presented thefacts as follows:
Loan Period 60months
Annual Interest Rate 6%
Down Payment 2,000
Monthly Payment 500
A. Determine the sales price by calculating the present value of the payments using a spreadsheet program. Present value of the monthly payments using 60 months=5 years X 12 months and monthly interest rate by dividing the annual interest rate of 6% by 12 months (0.06/12).
B. Is the dealer's behavior ethical?
C. Many types of goods are sold by sales persons who explain that the monthly payment is only a certain amount each month. Explain how an understanding of present value techniques can help consumers determine whether such a sales pitch is a fair deal.