Need Some Financial Advice - Specific Question On Discount Rate

[homersapien 11,354]

Here's the situation:  I have been shopping for a new tractor and Kubota is currently offering financing at 0% interest for 5 years. 

For personal reasons, I am planning to pay cash using my line of credit with my local bank.  The asking price is around $23,500 for the tractor alone (less new equipment which I plan to negotiate separately).   They offered me a paltry $500 discount for paying cash!

If $23,500 is what I will have paid for the tractor in 5 years that's the future value (FV as my financial calculator says), right?  In 5 years, Kubota gets $23,500 in payments but meanwhile, they have had to finance the tractor for 5 years.

After inputting the number of payment periods (60) and a discount rate (at a conservative 2%) the calculated Present Value (PV) of $20,189 or about $3,300 less than the asking price.

Since the discount rate represents the actual cost of Kubota's financing (instead of 0% ), the question then becomes what is a reasonable discount rate to apply?  Prime (5.2%)? 

I don't know much about corporate finance but I assume Kubota has options other than borrowing at prime, like issuing bonds.  (I did find an Asian bond index that listed the aggregate yield for 3 and 5 years at about 2%)

Any CFO's out there?   (Or anyone with relevant experience - as in sales?)

What would you use for a discount rate in such a situation at least as a first offer negotiating position?

Am I overlooking something?

 

 

[AU64 10,122]

Like you, I've tried to get a good FV discount on cars that are offered with zero percent "finance rate" and got a modest cash discount.    I figure that the companies are being bankrolled by their governments on exported products...which is one  of the things that has DT's panties in a wad making it almost impossible for domestic manufacturers to compete. 

Two possibilities....looking at the long term Fed rate, expect they can borrow money pretty cheap...if they want to....but more likely, there is a good chance their government (Japan) will "buy" their loan right away and they get the money as if you were paying cash.....so they get the full sales price... 

[kevon67 2,368]

39 minutes ago, homersapien said:

Here's the situation:  I have been shopping for a new tractor and Kubota is currently offering financing at 0% interest for 5 years. 

For personal reasons, I am planning to pay cash using my line of credit with my local bank.  The asking price is around $23,500 for the tractor alone (less new equipment which I plan to negotiate separately).   They offered me a paltry $500 discount for paying cash!

If $23,500 is what I will have paid for the tractor in 5 years that's the future value (FV as my financial calculator says), right?  In 5 years, Kubota gets $23,500 in payments but meanwhile, they have had to finance the tractor for 5 years.

After inputting the number of payment periods (60) and a discount rate (at a conservative 2%) the calculated Present Value (PV) of $20,189 or about $3,300 less than the asking price.

Since the discount rate represents the actual cost of Kubota's financing (instead of 0% ), the question then becomes what is a reasonable discount rate to apply?  Prime (5.2%)? 

I don't know much about corporate finance but I assume Kubota has options other than borrowing at prime, like issuing bonds.  (I did find an Asian bond index that listed the aggregate yield for 3 and 5 years at about 2%)

Any CFO's out there?   (Or anyone with relevant experience - as in sales?)

What would you use for a discount rate in such a situation at least as a first offer negotiating position?

Am I overlooking something?

 

 

500.00 discount is dang near insulting, basically there way of telling you we make more if you finance.........my best advice........do you really need a new tractor at this time?.......Dave Ramsey may disagree but if a necessity and I have the cash to spare I am not financing.

[AU64 10,122]

13 hours ago, kevon67 said:

500.00 discount is dang near insulting, basically there way of telling you we make more if you finance.........my best advice........do you really need a new tractor at this time?.......Dave Ramsey may disagree but if a necessity and I have the cash to spare I am not financing.

Shoot, if you are an old fart and can afford a new tractor, why not get a new tractor?    But seems that with the insulting offer for cash,   he might as well go ahead and finance it at zero interest and invest the money in some good dividend fund and create his own discount.  

[kevon67 2,368]

7 minutes ago, AU64 said:

Shoot, if you are an old fart and can afford a new tractor, why not get a new tractor?    But seems that with the insulting offer for cash,   he might as well go ahead and finance it at zero interest and invest the money in some good dividend fund and create his own discount.  

You know I somehow missed the 0% financing......odd considering all the Life Insurance policies I read over the years....You know 64 your a young 78 and I am a old soon to be 52.

[AU64 10,122]

2 minutes ago, kevon67 said:

You know I somehow missed the 0% financing......odd considering all the Life Insurance policies I read over the years....You know 64 your a young 78 and I am a old soon to be 52.

One of the interesting things about humans is the rate at which people "age" and I'm not sure how much control we have over the process if we follow reasonably good habits. ...as a doctor friend told me about my hdl…..it's a lot about genetics.   

BUT I think we have the ability to keep ourselves young in terms of the things we do, the activities we engage in , etc.  I should also point out that I've been reconstructed.....as I tell some people, I've got a new transmission and re-built engine so not like I'm the original version of myself....but I try to take advantage of my good fortune that the double by-pass and two hip replacements enable me to enjoy my life and children and grandchildren. 

And I now buy "new".....spent most of my life buying cars or golf clubs or whatever after someone else had the fun of driving it the first time.  Got a new driver that nobody has hit before I did it.....      Don't know if there is a "new tractor smell" but if so, Homer ought to experience it....JMO

[alexava 6,973]

Pay cash and take the 500$ you save and place a bet in Vegas on Auburn winning the national championship. 50-1 odds! Bam you’re rich again. 

[AU64 10,122]

5 hours ago, alexava said:

Pay cash and take the 500$ you save and place a bet in Vegas on Auburn winning the national championship. 50-1 odds! Bam you’re rich again. 

like getting a free tractor..... I like that....👍

[homersapien 11,354]

On 8/17/2019 at 7:24 PM, kevon67 said:

500.00 discount is dang near insulting, basically there way of telling you we make more if you finance.........my best advice........do you really need a new tractor at this time?.......Dave Ramsey may disagree but if a necessity and I have the cash to spare I am not financing.

No way I am going to pay cash based on just a $500 discount in lieu of 5 years worth of payments.

If that's the best they can do, I'll finance it.

And yeah, I will be needing tractor pretty soon considering one good hurricane that moves through my area will wipe my steep gravel drive out.

[homersapien 11,354]

On 8/18/2019 at 9:07 AM, AU64 said:

Shoot, if you are an old fart and can afford a new tractor, why not get a new tractor?    But seems that with the insulting offer for cash,   he might as well go ahead and finance it at zero interest and invest the money in some good dividend fund and create his own discount.  

This is pretty much what I've concluded.

This is a new tractor.

Their sales pitch is laden with "diversions" such as $1,000 rebates and a $900 dealer rebate (guaranteed until the end of August). 

Then there's the matrix of base tractors and configuration with  lot of overlap.  For example, they offer a 39hp or a 33 hp   X   manual or Hydrostatic transmission    X   a choice of wheels / tires - Ag or Industrial.

After doing a lot of research I've decided on the 33 hp/hydrostatic/Ag tires.  But the whole thing has been like participating in a shell game using spread sheets.

And while I could pay cash, withdrawing the money from my IRA will cost me the income tax rate or 5.1% from my bank.

[homersapien 11,354]

On 8/17/2019 at 7:19 PM, AU64 said:

Like you, I've tried to get a good FV discount on cars that are offered with zero percent "finance rate" and got a modest cash discount.    I figure that the companies are being bankrolled by their governments on exported products...which is one  of the things that has DT's panties in a wad making it almost impossible for domestic manufacturers to compete. 

Two possibilities....looking at the long term Fed rate, expect they can borrow money pretty cheap...if they want to....but more likely, there is a good chance their government (Japan) will "buy" their loan right away and they get the money as if you were paying cash.....so they get the full sales price... 

Interesting.  That would at least explain it.  (I was pretty sure Kubota hadn't repealed the time value of money. )

Kubota of America manufactures their tractors in America, but I guess that doesn't matter if they are financing from their parent company.  (Not sure if that equates to being financed by the Japanese government though, or if it is, why it's necessarily unfair.  But global corporate financing is not my strong suit.)

Regardless, FWIW, I shopped the John Deere line and Kubota is out competing them on the basis of product, not price, at least in the compact tractor line.

 

[AU64 10,122]

2 hours ago, homersapien said:

This is pretty much what I've concluded.

This is a new tractor.

Their sales pitch is laden with "diversions" such as $1,000 rebates and a $900 dealer rebate (guaranteed until the end of August). 

Then there's the matrix of base tractors and configuration with  lot of overlap.  For example, they offer a 39hp or a 33 hp   X   manual or Hydrostatic transmission    X   a choice of wheels / tires - Ag or Industrial.

After doing a lot of research I've decided on the 33 hp/hydrostatic/Ag tires.  But the whole thing has been like participating in a shell game using spread sheets.

And while I could pay cash, withdrawing the money from my IRA will cost me the income tax rate or 5.1% from my bank.

You can pay for the tractor from your RMD at least ...which is still taxable but since you have to take the money from your 401k  whether you need it or not, you might as well spend the money on something nice....

Sounds like a nice tractor package.....enjoy it....👍

[homersapien 11,354]

3 hours ago, AU64 said:

You can pay for the tractor from your RMD at least ...which is still taxable but since you have to take the money from your 401k  whether you need it or not, you might as well spend the money on something nice....

Sounds like a nice tractor package.....enjoy it....👍

Yeah, I get that, but RMD's are still over 2 1/2 years away for me (I think).

Frankly, my plans are to take a lot of my RMD's in the form of charitable distributions. (But not likely all of them.)  I see it as a pay-back.

[AU64 10,122]

31 minutes ago, homersapien said:

Frankly, my plans are to take a lot of my RMD's in the form of charitable distributions. (But not likely all of them.)  I see it as a pay-back.

Good plan...I use most of mine direct to the charitable institution....AU and my church...well, not direct but I got a check book and can write checks to drop in the plate but the money comes from my 401k and counts against my RMD....same for sending money to AU or whatever you like to help....but with the checks I think the minimum might be $1000.    As I get older the required amount is going up so I don't go 100% now but it's worth doing.   AND   you don't have to wait until the RMD kicks in to get some benefits from sending money direct from your 40ik account to qualified charitable recipient.    If you are not familiar with doing that you can find information with Fidelity or Schwab or whoever you work with.