Question

ABC Pvt Ltd proposes to buy a truck that costs ������ 50,000. The company has two alternatives:

 

Alternative I: Buy from Nice Car Ltd by making a down payment of ������ 15,000 and settling the balance with 60 monthly payments at 10 % per annum flat rate.

 

Alternative II: Buy from Cheap Car Ltd by making a down payment of ������ 10,000 and settling the balance with 60 monthly payments of ������ 690 each.

 

Which alternative should the company select? Show it by calculation in detail for both alternatives.

Answer 1

Alternative A,

the formulae below is used to determine the monthly repayment:

$P=\frac{A{(1-(1+r)^-n)}}{r}$

where p= cash price less deposit= 50000 less 15000

A= instalment payable at specified intervals= unknown and to be determined

n= number of instalments = 60 months equivalent to 5 years

r= rate of interest per period covered by each instalment; 0.10 divided by 5 years

Therefore, alternative A annual is instalment is determined below;

$35000=\frac{A{(1-(1+0.02)^-5)}}{0.02}$

A= 7423.117709

A= 7426 which is 618.79 monthly.

Alternative B,

The monthly payment is 690 which is 8280 annually and first deposit is 10000.

it is advisable to option for alt A since high balance requires higher interest and small installment payement.