Question

Problem 5.26

PV AND LOAN ELIGIBILITY

You have saved $3,000 for a down payment on a new car. The largest monthly payment you can afford is $400. The loan will have a 8% APR based on end-of-month payments.

a. What is the most expensive car you can afford if you finance it for 48 months? Do not round intermediate calculations. Round your answer to the nearest cent.

b. What is the most expensive car you can afford if you finance it for 60 months? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

1-	if period is 48 months
Down payment you have accumulated				3000
present value of monthly payment	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) rate = 8/12 = .666% nper = 48 pmt =-400 fv =0 type =0	PV(0.666%,48,-400,0,0)	$16,387.3
maximum price you can afford		3000+19387.29		$19,387.3
2-	if period is 60 months
Down payment you have accumulated				3000
present value of monthly payment	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) rate = 8/12 = .666% nper = 48 pmt =-400 fv =0 type =0	PV(0.666%,60,-400,0,0)	$19,731.1
maximum price you can afford		3000+22731.1		$22,731.1