Tony wants to buy a new boat. He can afford to pay $150 a month for 5 years. If the appropriate discount rate is 4.6 percent compounded monthly, what amount can he spend to buy the boat?
$7,920.00
$8,026.32
$7,153.95
$9,000.00
$8,186.84
Answer is $8,026.32
Monthly payment = $150
Annual interest rate = 4.60%
Monthly interest rate = 4.60% / 12
Monthly interest rate = 0.38333%
Time period = 5 years or 60 months
Present value of payments = $150/1.0038333 + $150/1.0038333^2 +
… + $150/1.0038333^59 + $150/1.0038333^60
Present value of payments = $150 * (1 - (1/1.0038333)^60) /
0.0038333
Present value of payments = $150 * 53.508823
Present value of payments = $8,026.32
Therefore, Tony can spend $8,026.32 to buy the boat.
Get Answers For Free
Most questions answered within 1 hours.