Question

Racecar Rita can afford a $450 per month car payment. She found a 5-year loan at a 3% interest rate. How big of a loan can Racecar Rita afford? Round to the nearest cent.

Answer #1

Solution

Here the Present value of the loan payments will be equal to the largest loan that can be taken

The formula for Present value of ordinary annuity is given below

Present value of annuity=Loan amount=Annuity payment*((1-(1/(1+i)^m))/i)

where

i-discount or intrest rate per period-3/12=.25% per month

m-number of periods =5*12=60

Present value of annuity =Loan amoun she can rais=?

Annuity payment=Monthly payment=450

Putting values in formula

Present value of annuity=450*((1-(1/(1+.0025)^60))/.0025)

Solving we get

Present value of annuity =25043.56

**Thus the loan Racecar Rita can afford is
$25043.56**

**If you are satisfied with the answer,please give a
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