Cars Sold A finance manager employed by an automobile dealer

Cars Sold A finance manager employed by an automobile dealership believes that the number of cars sold in his local market can be predicted by the interest rate charged for a loan. Interest Rate (%) Number of Cars Sold (100s) 3 10 5 7 6 5 8 2 The finance manager performed a regression analysis of the number of cars sold and interest rates using the sample of data above. Shown below is a portion of the regression output. Regression Statistics Multiple R 0.998868 R2 0.997738 Coefficient Intercept 14.88462 Interest Rate -1.61538 1.Are there factors other than interest rate charged for a loan that the finance manager should consider in predicting future car sales? 2. Is interest rate charged for a loan the most important factor to be considered in predicting future car sales? Explain your reasoning.The dealership’s vice-president of marketing has requested a sales forecast at the prevailing interest rate of 7%. 3. As finance manager, what reasons would you convey to the vice-president in recommending this forecasting model? 4. Is the prediction of car sales at 7% a reflection of the current downturn in the economy? How might this impact the dealership’s business?

Solution

(1) Interest rate is not the solde determinant of car sales. The other factors to consider are:

(a) Consumer income.

Even at low interest rates, car sales will not pick up unless consumer income is high enough to pay for the car loan. The higher the income, the higher the car sale.

(b) Macroeconomic conditions.

If macroeconomic condition is strong, then consumer income is likely to be higher. During recession, car sales slow down.

(2)

In recent times, consumer income is more important in determining car sales than interest rate is, since higher income enables consumers to buy a car even if interest rate is high, but with lower income they cannot afford even lower-rate car purchase.

(3)

However, as finance manager, I recommend this model as a forecasting model because it presents a relationship between car sales and interest rate. A R² value of more than 99% indicates that the model is a excellent fit for the regression.

(4)

Regression equation for car sales:

Number of cars sold = 14.88462 - 1.61538 x Interest rate.

= 14.88462 - 1.61538 x 7

= 14.88462 - 11.3077

= 3.577

To compare it with average car sales for 7% interest rate, I need to understand the actual data (used for regression). Interest rate & Car sales numbers of not clear. Which is which? Without clear data I can\'t assess the actual number of cars sold when interest rate is 7% so that I can evaluate if the regression data returns a lower or higher number.