Question

You've landed your first job out of college and they are paying you money like you've never seen before! So, you have decided to buy a new car at the end of eighteen months in your new position, which is paying you $8,200 a month. Your graduation money has totaled $7,500 and the car you like is priced at $25,500. How much of your paycheck will you need to put away at the end of each month in an 8.85% account that compounds on a monthly basis in order to buy the car and pay for it in cash?

Answer 1

Interest Rate =8.85 % per annum or (8.85/12) = 07375 % per month

Salary = $8200 per month, Graduation Money = $ 7500 and Target Future Value = Car Price = $ 25500

Let the amount put aside per monthe be $ P

Therefore, 7500 x (1.007375)^(18) + P x (1.007375)^(17) + P x (1.007375)^(16) + .....+ P x (1.007375) + P = 25500

8560.56 + P x [{(1.007375)^(18) - 1} / {1.007375 - 1}] = 25500

P x 16.7985 = 16939.44

P = 16939.44 / 16.7985 = $ 1008.39

Portion of Salary Kep Aside = (1008.39 / 8200) x 100 = 0.122974 or 12.297 %