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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
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?
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