Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle

Exercise 1

Jay Wechsler agrees to purchase a car from a local dealer, the Con Car Co. The purchase price is $15,000. Jay has the cash to pay the entire amount and wants to do so. Con's sales manager uses the following argument to convince him to finance the car: "All we require is a down payment of $3,000. Then you can borrow the $12,000 from our finance company at 12 percent. You will make monthly payments of $266.93 for 5 years (60 months), a total of $16,015.80. If you do that, you get to keep your $12,000. Now suppose you keep this money in a money market account that pays you 8 percent compounded quarterly. In 5 years, the $12,000 will grow to $17,831.40. That means that you will be better off by $1,815.60 than if you pay the $12,000 in cash."
Assume all the numbers are correct. Does the offer sound too good to be true Why (This is an argument often used by automobile dealers. One of the authors encountered it when buying a car.)