1st payment done

   / 1st payment done #51  
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
 
   / 1st payment done #52  
I don't want to appear insistent, but our company receives offers of lines of credit regularly from the banks we use and from other sources. These lines of credit have an interest rate associated with them. 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.

OK. Now what you are saying makes more sense than that rude 5 percent & "rank amateur" comment. I agree that the CD payment analogy and also think that it is an excellent place to start. But I'm going to argue that it still isn't that simple. BTW, I think that these discussions have a lot of value even on a tractor forum.
Tractors are expensive long term purchases. And like it or not, all of us have to be a lot more sophisticated and involved in our own finances now than ever used to be the case.

On the CD shouldn't we also consider the time value of money and also taxes? After all, the government is going to take a major bite out of whatever we get from the CD. So it isn't $4000 profit. More like $3000 and might even be closer to two. Then there is inflation. For years now the purchasing power of money invested in the CD has been declining faster than the CD is earning interest. And that's a real BIG problem....

Personally, we don't consider our tractor as a financial investment. It is much more valuable than that. Tractoring is a hobby and pays interest in the form of health, not dollars. I love to do outside projects and believe they are good exercise if one avoids the heavy straining. My father spent the last 20 years of his life nursing a bad back caused by a lifetime of too much lifting, bending, digging, and toting. The way I figure it, the price of a loader tractor to help do these things and save my back in the process is a good investment. So does my wife. In fact, she's the one that insisted on a brand new tractor.

So since our investment is more in health than dollars, it makes sense to just buy the thing instead of endless worries over price. What we did was to negotiated a cash price with every intention of paying with cash. That took about a month of visits. And when the price got down close to what I figured the dealer had into the tractor we threw in a few things that mattered to us but which didn't cost the dealership much - like an extended warranty - and called it a deal.

And when the salesman airily remarked that it didn't really matter to him whether we paid cash or took the 0% payments...well, of course we immediately took him up on the payments and invested the cash ourselves.
Shucks, we aren't stupid.... :)

BTW, we use lines of credit in our business too. And I agree with you that maintaining lines of credit is a completely different subject. Instead of simply financing the purchase of a tractor, it becomes financing the purchase of a loan to finance the purchase of a tractor. There's a point where the complexity of the loans overwhelms the small amount of money to be saved.
Unless it's a hobby of course.
rScotty
 
   / 1st payment done #53  
   / 1st payment done #54  
I have a problem. Education Degrees in Business and Psychology. Retired Gvmnt worker as Auditor and Counselor/Administrator and College Professor and Real Estate Broker.
First, some times Kubota has offered a cash discount (my last purchase $700) and some times they haven't and I believe when Steve Barlow tells me there is no cash discount.
Now comes my (issue). From my Business "side" most of the time for most of the people the 0% financing is the best deal. Someone that fills out the long tax form (Schedule C Business income and deductions) are in a minority so notice I said most of the time.
From my Counselor "side" for many people due to their back ground and personality they should pay cash and don't buy till they have cash. If you grew up in the Depression or heard from your parents all your lives about growing up in the depression, pay cash and know you are right!!:thumbsup:
If you have other debt that has higher interest I feel fairly safe that most people in this situation should use their cash to pay off the other interest laden debt and take the 0% financing.
There are exceptions to every rule. Every rule!!!
 
   / 1st payment done #55  
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

It really doesn't matter that much when it is known that dealers will allow only a $1,000 discount for a cash purchase. Even a tax free Muni fund pays 4% so taxes are not a part of the game if one wants to be conservative. BTW, I have forgotten more about finance than you will ever learn in my 40+ years in the business.
 
   / 1st payment done #56  
It really doesn't matter that much when it is known that dealers will allow only a $1,000 discount for a cash purchase. Even a tax free Muni fund pays 4% so taxes are not a part of the game if one wants to be conservative. BTW, I have forgotten more about finance than you will ever learn in my 40+ years in the business.

It appears you have also forgotten quite a bit about manners and class.
 
   / 1st payment done #57  
It really doesn't matter that much when it is known that dealers will allow only a $1,000 discount for a cash purchase.

Sir,

Extraordinary claims require extraordinary proof.

I have no way of knowing that it is the case. Perhaps members who have negotiated for a cash price can comment.

BTW, Kubota is offering rebates of $1,500, $2,000, and $2,500 for cash purchases on selected models.

Finance Customer Rebates

BTW, I have forgotten more about finance than you will ever learn in my 40+ years in the business.

That may be the case, but you appear to have forgotten material that is covered in an introductory finance course.:)

Have a good day.

Steve
 
   / 1st payment done #59  
We agree on most things.:thumbsup: This is one for sure.

I probably should have just stayed out of all of this. I like this forum as it is usually a pleasant place to visit for information and advice; a place where people can disagree without being disagreeable. Some just can't seem to do this and I don't understand why; we all have a shared interest and passion. I only hope I am not or do not become one.
 
   / 1st payment done #60  
I probably should have just stayed out of all of this. I like this forum as it is usually a pleasant place to visit for information and advice; a place where people can disagree without being disagreeable. Some just can't seem to do this and I don't understand why; we all have a shared interest and passion. I only hope I am not or do not become one.

Larry,

I hope that you have not taken my comments on this topic as being disagreeable. Some statements seem so outrageous to me that I can't resist disagreeing. My apologies if I have offended.

Steve
 

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