Question

Stereo Inc sells a stereo system for $500 down and monthly payments of $80 for the next 5 years. If the interest rate is 6%per year compounded monthly find:

The cost of the stereo.

The total amount of interest paid.

Answer 1

Down payment = $500
Monthly payment = $80
n = 5 years = 5 x 12 = 60 months
Interest rate = 6%/12 = 0.5%

Present value of the monthly payments = P x (1 - (1/(1+r)^n))/r
= 80 x (1-(1/(1+0.005)^60))/0.005
= $4,138.04

Cost of the stereo = Down payment + Present value of the monthly payments
= $500 + $4,138.04
= $4,638.04

Total amount paid = $80 x 5 x 12 = $4,800

Total amount of interest paid = Total amount paid - Cost of the stereo
= $4,800 - $4,638.04
= $161.96