Question

If sandy can afford car payments of $300 a month for five years, what is the price of the car she can afford now? Assume an interest rate of 8.4 percent.

Sandy can afford a car that costs __ or less

Round to the nearest dollar as needed.

Answer 1

The price is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 8.4% / 12 (Since the payments are on monthly basis, hence divided by 12)

= 0.7% or 0.007

n is computed as follows:

= 5 x 12 (Since the payments are on monthly basis, hence multiplied by 12)

= 60

So, the amount will be computed as follows:

= $ 300 x [ (1 - 1 / (1 + 0.007)⁶⁰ ) / 0.007 ]

= $ 300 x 48.85587164

= $ 14,656 Approximately

So, Sandy can afford a car that costs $ 14,656 or less.

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