Calculation Of Average Monthly Payment For A Car Sale

Question

You are the owner of a used car business near the York campus. Your company borrows money from a bank on a line of credit with a monthly interest rate of 0.50%. You know that some of your customers may not have the best credit rating, so you have decided that you need to charge all customers a higher interest rate (than your own bank rate) when they finance their purchases. Your average sales price per used car is $6,500 when it is financed for 36 months at an 18% APR with monthly compounding.

a) What is the dollar amount of a customer’s monthly payment on your “average” car sale? Assume payments are made at the end of the month.

b) What is the dollar amount of a customer’s monthly payment if payments are made at the beginning of each month and the customer pays $1,000 cash up front?

c) Would your profit be higher or lower if a customer made cash purchase, paying the entire $6,500 immediately, instead of the 36 payments calculated in part a)? Explain why the profit is different, and compute the dollar amount of the change in profits.

Summary

The question belongs to Finance and it discusses about calculating average monthly payment for a car and also whether or not it is profitable if the buyer pays the entire amount once or in 36 months.

Total Word Count 268