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Suppose you go to buy a GM car. The car is priced at $24,000. The salesperson offers you interest-free financing, for three years, with no money down. Or, she tells you that if you pay cash for the car, you get $3000 cash back. To make things simple assume this means you pay $8,000 at the end of the first year, $8,000 at the end of the second year, and $8,000 at the end of the third year after buying the car.

Suppose the market interest rate, at which you can borrow or lend, is 5 percent. What is the present discounted value of the cost of the car if you use GM's interest-free financing?

Microeconomics, Economics

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