You want to buy a car in the future and you are thinking about how much money you can save and what you can afford.
1) You see a car that you like for $15,000. The car salesman gives you two choices:
a. Buy the car today in cash and pay $14,000 as you get a $1,000 rebate if you buy immediately
b. Buy the car for the full $15,000. Pay for the car in equal monthly installments over 3 years with 0% percent interest.
Assume a 4% discount rate. Which is the cheaper option? By how much?
2) Suppose you want to save up to buy a really nice car. You want to have $50,000 saved by the time you are 25 (assume you are 20 now).
a. If you can earn 5% on an annual basis on your savings, how much money would you have to invest TODAY to reach your goal?
b. You want to devise a monthly savings plan and your goal is to save $30,000 at the end of 3 years. How much will you have to save monthly assuming a 4% annual interest rate?
3) You decide you want to buy a car now and you found one for $17,600. You put 20% down and finance the remaining balance at 4.9% (annual) with monthly payments over 3 years.
a. How much of the loan will you have left at the end of 12 months?
b. You really want to save for retirement in 30 years. So you plan on investing the amount of your car payment in starting in year 4 (after you paid off your loan) into an investment that pays you 9% (annual) a year. However, you want to figure out the cost of your car in retirement terms. So you run the numbers assuming you invested your monthly car payment for the full 30 years into the same investment with a 9% annual return. What was the cost of the car in retirement terms? Meaning that if you did not buy your car and take out a loan and you invested all the payments towards retirement, how much more would you have in retirement?