Question

Rasheed can afford a monthly car payment of ​$600 for 5 years at an annual interest rate of 4 percent. Which of the following is closest to the amount he will be able to borrow for a new​ car? ​ Remember, loans are END of period.

Answer 1

Answer:

Monthly payment (A)

Interest rate (r) = 4% = 0.04

Number of years = 5 years

Number of times payment is made in a year (m) = 12

PV = A(1 - (1 + r/m)-nm)

                r/m

PV = $600(1 - (1 + 0.04/12)-5)

                         0.04/12

PV = $600(1 - (1 + 0.0033)-5)

                            0.0033

PV = $600(1 - (1.0033)-5)

                       0.0033

PV = $600 x 4.950878649

PV = $2,971

Explanation:

In this case, we need to apply the formula for present value of ordinary annuity. The monthly payments, interest rate and number of years were provided in the question with the exception of present value. Therefore, we will make the present value the subject of the formula.