Question

Mary can afford $175 a month for 4 years for a car loan. If the interest rate is 4.1% compounded monthly, how much can she afford to borrow to purchase a car?

Group of answer choices

$8,115

$5,939

$5,165

$7,735

$4,328

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:

= 4.1% / 12 (Since the interest is compounded monthly, hence divided by 12)

= 0.341666667%

n is computed as follows:

= 4 x 12 (Since the interest is compounded monthly, hence multiplied by 12)

= 48

So, the amount is computed as follows:

= $ 175 x [ (1 - 1 / (1 + 0.00341666667)⁴⁸ ) / 0.00341666667 ]

= $ 175 x 44.20118794

= $ 7,735 Approximately

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