smstonypoint
Super Member
- Joined
- Oct 13, 2009
- Messages
- 5,820
- Location
- SC (Upstate) & NC (Piedmont)
- Tractor
- NH TN 55, Kubota B2320 & RTV 900, Bad Boy Outlaw ZTR
What we are talking about here is free money, zero interest rate. This is highly unusual when the benefit offered for paying cash is a measly $1,000 on tractors that can cost upwards of 40K. Anyone that has cash in that amount would be extremely foolish to tie it up for a depreciating asset when that same cash, invested, can earn even a 2 or 3 percent rate of return (and that can be had with a CD). Even put in a 2% CD, 40K in 5 years will earn you $4,000. Why would anyone take accept a discount of anything less than that for paying cash.
Come on folks, it isn't rocket science.
You are correct that it isn't rocket science, it is a practical finance problem. Your logic is flawed on two counts.
1. You assume that the loan principal is repaid in a lump sum at the end of the loan (i.e., a balloon payment). In reality, the principal has to be repaid in monthly installments. Any investment alternative would have to allow periodic withdrawals to accommodate this fact.
2. You ignore the effect of taxes. A proper analysis would have to take into account the state and federal income taxes (ordinary, capital gain, dividend as appropriate) paid on earnings during the term of the loan.
Assuming a 2% discount rate and ignoring the tax effect, the present value of 60 equal monthly payments of $666.67 ($40,000/60 months) is $38,034.90. (This is an ordinary annuity calculation.)
If the buyer could negotiate a lower cash price, he/she would be better off paying cash. The tax effects would raise the present value of the cash outflows from financing and make financing relatively less attractive.
Steve