Question

ou have received a job offer upon graduation from a prestigious consulting firm. Before you receive your first paycheck, you have decided to purchase a $97,400 Porsche. The Worst National Bank of Fowlerville is willing to give you a 5-year loan with monthly payments, but they require a 10% down payment. The annual interest rate of the loan is 12%. Assuming you will make the required down payment, how much will your monthly payments be?

Multiple Choice

• $1,949.95

• $2,166.61

• $2,257.31

• $2,508.12

• $11,701.04

Answer 1

The monthly payment is computed as shown below:

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

Present value is computed as follows:

= Purchase price - 10%

= $ 97,400 - 10%

= $ 87,660

r is computed as follows:

= 12% / 12

= 1% or 0.01

n is computed as follows:

= 5 x 12

= 60

So, the amount of monthly payment will be computed as follows:

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

$ 87,660 = Monthly payment x [ (1 - 1 / (1 + 0.01)⁶⁰ ) / 0.01 ]

$ 87,660 = Monthly payment x 44.95503841

Monthly payment = $ 87,660 / 44.95503841

Monthly payment = $ 1,949.95 Approximately

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