Question

Phil can afford $150 a month for 6 years for a car loan. If the interest rate is 5.5 percent compounded monthly, how much can he afford to borrow to purchase a car? rev: 10_26_2013_QC_37910

$9,364.74

$9,181.11

$10,800.00

$9,504.00

$7,770.23

Answer 1

The amount is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 5.5% / 12 (Since the payments are on monthly basis, hence divided by 12)

= 0.458333333% or 0.00458333333

n is computed as follows:

= 6 x 12 (Since the payments are on monthly basis, hence multiplied by 12)

= 72

So, the amount will be computed as follows:

= $ 150 x [ (1 - 1 / (1 + 0.00458333333)⁷² ) / 0.00458333333 ]

= $ 150 x 61.2074258

= $ 9,181.11 Approximately

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