Scenario Analysis 2B

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?