Question

Todd can afford to pay $325 per month for the next 6 years in order to purchase a new car. The interest rate is 5.5 percent compounded monthly. What is the most he can afford to pay for a new car today?

Answer #1

Price of car today |
$ 19,892.64 |
||||||||||||

Working: | |||||||||||||

Price of car today is the present value of cash flows in future. | |||||||||||||

Present Value of Cash flows | = | Annuity * Present value of annuity of 1 | |||||||||||

= | $ 325.00 | * | 61.20813 | ||||||||||

= | $ 19,892.64 | ||||||||||||

Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | ||||||||||

= | (1-(1+0.004583)^-72)/0.004583 | i | 5.5%/12 | = | 0.004583 | ||||||||

= | 61.2081264 | n | 6*12 | = | 72 | ||||||||

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