Assignment 3: Used Car Purchase
C.Théoret Fall 2011
A. Assignment Instructions
1. Please complete the two assignments that have been randomly assigned to you.
2. Completing other assignments will result in a zero score.
3. It is recommended (although not compulsory) that Excel be used to
prepare tables and graphs (as required).
4. A paper version (no electronic version will be accepted) of the assignments must be submitted by the end of the October 18th lecture.
5. Late assignments will not be accepted.
6. Each assignment is worth 5% of the overall course grade.
B. Problem Statement
You are pondering the purchase of a used car with a $10,000 price tag from Honest John Inc. Two financing options are available:
Credit Option: $2,000 down payment and 24 equal monthly payments (with the first payment in one month) at 8% compounded quarterly.
Cash Option: $9,500 immediately. This option would require the sale of your corporate bonds which currently earn 6% compounded monthly.
C. Assignment Requirements
C.1 What is the effective (annual) rate of interest with the Credit Option?
C.2 What is the monthly car payment with the Credit Option?
C.3 By what percentage (%) would the 18th monthly payment of the Credit Option reduce the outstanding (unpaid) debt?
C.4 How much cash would clear the outstanding debt in the Credit Option immediately after making the 6th monthly payment (your favourite aunt willed you $50,000)?
C.5 What would be your total interest charges ($) during the full duration of the Credit Option?
C.6 Which option, Credit or Cash, is better (less costly)? Credit? Cash?
ECO 1192B – Winter 2011 Assignment 3: Car Purchase Page 2 of 2