Question

A smooth-talking used-car salesman who smiles considerably is offering you a great deal on a "pre-owned" car. He says, "For 7 annual payments of $2,500, this beautiful 1998 Honda Civic can be yours." If you can borrow money at 8%, what is the price of this car? Assume the payment is made at the end of each year.

Answer 1

Answer:

The price of this car=$13,015.925

Explanation:

Given data:

Amount each year=$2,500

Time period=7 years

interest rate=8%

Required:

The price of this car=?

Solution:

The Formula we are going to use is:

$PV=A*(\frac{1-(1+r)^{-n}}{r})$

Where:

PV is the price of car i.e present value

A is the payment made each year

n is the time period in which payments are paid

r is the interest rate

A=$2,500, r=8%=0.08,  n=7

$PV=\ 2,500*\frac{1-(1+0.08)^{-7}}{0.08} \\PV=\ 13,015.925$

The price of this car=$13,015.925