Question

Jennifer wants to buy a car, and she has found a deal that requires no money...

  1. Jennifer wants to buy a car, and she has found a deal that requires no money down (i.e., no cash payment up-front). If she can afford to pay $800 per month and the monthly interest rate is 1% per month for a 3-years car loan.

(Hint: 1. be careful about the payment period and periodic interest rate. 2. If you buy the car, you can get the car now, and pay the cost (interests and principal) for 12*3 months. Not to be confused, please draw a timeline!)

  1. What is the most expensive car she can afford to buy?

  1. What would be the monthly payment for a car that costs $36,000?
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Homework Answers

Answer #1

Given,

She can afford = $800 Per Month, Loan = 3 years, Interest Rate = 1% Per Month

i) Step 1 : We need to calculate the present value of annuity factor using below formula

Here,

PVA = Present Value of Annuity

PVAF = Present Value of Annuity Factor

PMT = Annuity Payment

n = Number of periods

Step 2 : We need to calculate the present value of annuity using below formula

She can afford More expensive car of $24086.

ii) Monthly PMT of Car that Cost (Loan Amount) $36,000

We need to calculate the annuity payment using below formula

Monthly payment = $1195.71.

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