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3) You have decided to purchase a new car and can afford monthly car payments of...

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?

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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 1.00671 + $ 400 1.00672 + $ 400 1.00673 + $ 400 1.00674 + $ 400 1.00675 + $ 400 1.00676 + -------------------------------+ $ 400 1.006759 + $ 400 1.006760

Present value of monthly payment = $19,708.76

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

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