Suppose that you want to purchase a new truck from a local dealership.
 The dealership is offering 2.0% financing for 4 years (term= 48
months).   They are also offering a $3,000 cash rebate (subtracted
from the purchase price) for an externally financed deal.  You are
able to secure a note from your local bank for the same 4 year term at
3.95% interest up to a maximum purchase amount of $50,000.   At what
total purchase price will you have the same monthly payment between
these two offers?  Under what circumstances would you choose one over
the other?

---

Request for Question Clarification by elmarto-ga on 23 May 2005 05:20 PDT

Hi juama,
Are we to assume that the capital payment (the total purchase price)
is done fully at the end of the 4th year, or is it divided evenly and
payed each month along with the interest payments?

Also, does the dealership do partial financing? What happens in this
case with the cash rebate?

Best regards,
elmarto

With truck of 50,000 if you financed with a bank you will need a loan
of only 47,000 since 3000 will be deducted from purchase price
Then your monthly instalement = 1060.16
(this you can get using Excel's PMT function 
=pmt(3.95%/12,48,-47000)

If financed thru dealer at 2% your loan instalement for 48 months = 1084.76
(=pmt(2%/12,48,-50000)

Its therefore cheaper to go with the bank.

The difference of $3000 in the principal equals an additional $65.09
payment per month (pmt(2%/12,48,-3000).

When the truck value is 78,543.31 the instalement in both the
situations equals 1,704.01 and anytime it goes over that value its
cheaper to finance it with the dealer @ 2%