Question

You are looking to buy a car. You can afford $440 in monthly payments for four years. In addition to the loan, you can make a $1,100 down payment. If interest rates are 7.25 percent APR, what price of car can you afford (loan plus down payment)? (Do not round intermediate calculations and round your final answer to 2 decimal places.).

Answer 1

Answer:

You can afford a car worth $29,399.05

Explanation:

Step 1

Determine the present value of the car using the expression below;

Present value=total monthly payments+down payment

where;

total monthly payments=monthly payments+number of months

monthly payments=$440

number of months in 4 years=4×12=48 months

replacing;

total monthly payments=(440×48)=$21,120

total monthly payments in 4 years=$21,120

down payment=$1,100

replacing;

Present value=(1,100+21,120)=$22,220

Step 2

Determine the future value by the expression below;

F.V=P.V(1+r)^n

where;

F.V=future value

P.V=present value=$22,220

r=annual interest rate=7.25%=7.25/100=0.0725

n=4 years

replacing;

F.V=22,220(1+0.0725)^4

F.V=22,220(1.0725)^4

F.V=$29,399.05

You can afford a car worth $29,399.05