An automobile is priced at $7,000. A buyer may purchase the car for $6,500 now, or alternatively, the buyer can make a down payment of $1,000 now and pay the remaining $6,000 in eight equal quarterly payments (over 2 years) at 8 percent compounded quarterly. If the buyer's TOM is 10 percent per year compounded quarterly, would the buyer prefer to pay the $6,500 outright, or make the down payment and the quarterly payments? What is the effective annual TVOM at which these two payment options are equivalent?

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16-07-2024
Business

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An automobile is priced at $7,000. A buyer may purchase the car for $6,500 now, or alternatively, the buyer can make a down payment of $1,000 now and pay the remaining $6,000 in eight equal quarterly payments (over 2 years) at 8 percent compounded quarterly. If the buyer's TOM is 10 percent per year compounded quarterly, would the buyer prefer to pay the $6,500 outright, or make the down payment and the quarterly payments? What is the effective annual TVOM at which these two payment options are equivalent?

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