Question

- 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!)

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

- What would be the monthly payment for a car that costs $36,000?

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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