Alejandra wants to buy a new Ford car. She sees the following ad:
2016 ford fiest. 0% APR for 66 mos. or $2,000 cash back
1. She has negotiated a sales price of $14,580 and she has a $1,000 down payment. She is eligible for the full $2,000 cash rebate. Her bank has pre-approved her for a 60-month car loan at 3.20%.
a) Assuming Alejandra wants the cheapest overall price, which option should she take? Should she take the 0% financing offer for 66 months from the dealer, or should she borrow the money from her bank at 3.20% to pay the dealer and receive the $2,000 cash rebate?
b) Why should Alejandra make this decision based on overall price, not monthly payment?
2. Now suppose she is only able to get $950 cash back (with the 3.20% financing from her bank). Does this change her decision?
3. Suppose Alejandra can only arrange financing at 7.50% instead of 3.20%. The cash rebate remains at $2,000. Does this change her initial decision?