Question

A car's price is currently $20,000 and is expected to rise by 4% a year. if the interest rate is 6%, how much do you need to put aside today to buy the car one year from now?a. $18,182
b. $19,231

c. $19,263d. $14,085

Answer 1

Answer:

• $19,591.63

Explanation:

1. Calculate the price of the car in a year from now.

This is add the 4% on the current price:

• $20,000 × 1.04 = $20,800

2. Calculate the amount of money that must be put aside to have $20,800 in a year:

Use the formula of monthly compound interest, with 6% annual interest

• r = 6% / 12 = 0.06/12 = 0.05

• P(1 + 0.005)¹² = $20,800

• P = $20,800 / (1 + 0.005)¹² = $19,591.63