Question

3) You have decided to purchase a new car and can afford monthly car payments of $400. Assuming you decide to make payments for 60 months and can get an annual interest rate of 8%, what is the maximum purchase price you can afford?

Answer #1

The maximum purchased price you can afford is equal to the present value of the monthly car payments

Annual interest rate = 8%

Monthly interest rate = 8% 12

Monthly interest rate = 0.67%

Present value of monthly payment = $ 400
1.0067^{1} + $ 400
1.0067^{2} + $ 400
1.0067^{3} + $ 400
1.0067^{4} + $ 400
1.0067^{5} + $ 400
1.0067^{6} + -------------------------------+ $ 400
1.0067^{59} + $ 400
1.0067^{60}

Present value of monthly payment = $19,708.76

**The maximum purchase price you can afford =
$19,708.76**

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