# Thread: How to calculate the present value?

1. ## How to calculate the present value?

My homework question goes like this:

You are purchasing a new car. The price is $18,239. You will pay$2,000 now and the rest, monthly, in a 4-year loan. The automobile dealership is offering a sales promotion where either:

1) You will receive a $1,000 rebate check now and the annual interest rate on the loan is 11.9% or 2) The annual interest rate on the loan will be 1.9% but there is no rebate. Compare the two options by calculating the present value of each option, assuming the discount rate is 8%. Which is a better deal? I'm allowed to use Excel but I don't even know where to begin! Thank you! 2. Originally Posted by pocketrocket My homework question goes like this: You are purchasing a new car. The price is$18,239. You will pay $2,000 now and the rest, monthly, in a 4-year loan. The automobile dealership is offering a sales promotion where either: 1) You will receive a$1,000 rebate check now and the annual interest rate on the loan is 11.9% or

2) The annual interest rate on the loan will be 1.9% but there is no rebate.

Compare the two options by calculating the present value of each option, assuming the discount rate is 8%. Which is a better deal?

I'm allowed to use Excel but I don't even know where to begin!

Thank you!
In Excel you have to search for the NPV function.

Otherwise, to calculate it by hand, just manipulate the compound interest formula.

So the present value for a certain year will be given by:

$\displaystyle P = \frac{A}{\left( 1 + \frac{i}{100} \right) ^n}$

Where $\displaystyle i$ is the interest and $\displaystyle n$ the period time.