Question

Rula has purchased a new car for $15000. She paid $2,000 as a down payment, and she paid the remaining balance by a loan from her hometown bank. Rula will pay off the loan by equal annual installments of $4280. How many years will it take Rula to pay off the loan, given an opportunity cost of 12%?​

Answer 1

Answer: 4 years

Explanation:

First find the amount Rula borrowed from her hometown bank:

= Price of car - Down payment

= 15,000 - 2,000

= $13,000

The amount that Rula is to pay is an annuity. The loan is the present value of that annuity.

Present value of annuity = Annuity * Present value interest factor of annuity

13,000 = 4,280 * Present value interest factor of annuity

Present value interest factor of annuity = 13,000 / 4,280

= 3.0373

Use an annuity table to find out the year that 12% as a discount rate intersects with, such that the present value of interest factor of annuity is 3.0373.

That number is:

= 4 years