Question

7. You want to buy a Mustang for $36K. The loan officer at the Chevrolet dealership will loan you the entire amount at an annually stated rate of 7.50%. (a) You and the lender agree on a 5-year loan, with five payments to be made, one at the end of each year for the next 5 years; thus calculate the size of your annual payment. (b) You and the lender agree on a 5-year loan, with 60 payments to be made, one at the end of each month for the next 60 months; thus calculate the size of your monthly payment. Answers: $8897.93 and $721.37.

Answer 1

Present value (PV) = $ 36000 and Rate of interest (RATE) = 7.5%

(a) Tenure (NPER) = 5 years;

Using Excel formula, for finding the value of the annual payments:

PMT(RATE,NPER,-PV,FV,0) = PMT(7.5%,5,-36000,,0) = $ 8897.93

Answer: (a) $ 8897.93 annual payment for 5 years

(a) Tenure (NPER) = 5 years or 5 * 12 = 60 monthly payments

Using Excel formula, for finding the value of the monthly payments:

PMT(RATE/12,NPER,-PV,FV,0) = PMT(7.5%/12,60,-36000,,0) = $ 721.37

Answer: (a) $ 721.37 monthly payment for 60 months