A business owner needs a new truck to help his business grow. It costs $25,000 right now and the price is expected to rise about 10 percent compounded quarterly. How should he make this purchase if he can afford about $400 per month in payments for this truck and his income is expected to go up slowly? Here are two options:
* He could buy the truck now. He could get $5000 as a trade-in on one of his current trucks. The financing of the balance would be at a rate of 16 percent compounded quarterly for a period of 3 years.
* He could set up a sinking fund at a bank. The rate would be 12 percent compounded quarterly. (Note: when he buys the new truck in 3 years, the trade-in will be worth less and the new truck will probably cost more.)
Consider these questions as you make your decision:
* Which approach is more affordable?
* What are the comparative total costs of each of these two options?
* What are the most important mathematical factors for the business owner to consider?
* If the business owner had the cash, would he be better off buying the truck now without financing? Why or why not?
* He could buy the truck now. He could get $5000 as a trade-in on one of his current trucks. The financing of the balance would be at a rate of 16 percent compounded quarterly for a period of 3 years.
* He could set up a sinking fund at a bank. The rate would be 12 percent compounded quarterly. (Note: when he buys the new truck in 3 years, the trade-in will be worth less and the new truck will probably cost more.)
Consider these questions as you make your decision:
* Which approach is more affordable?
* What are the comparative total costs of each of these two options?
* What are the most important mathematical factors for the business owner to consider?
* If the business owner had the cash, would he be better off buying the truck now without financing? Why or why not?
