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You have just purchased a Kia with a $20,000 price tag. The dealer offers to let you pay for your car in five equal annual installments, with the first payment due in one year.
a. If the dealer finances your purchase at an interest rate of 10%, how much will your annual payment be? Hint: The present value of all the payments must be equal to the price of the car.
b. How much would your payment be if you had purchased a $40,000 Camry instead of a $20,000 Kia?
c. How much would your payment be for the $20,000 Kia if you arranged to pay in 10 annual installments instead of 5? Does your payment fall in half? Why or why not?
d. If you buy the Kia with five equal payments as in part a), how much would your payment fall if you paid $10,000 down at the time of purchase?
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