Question

Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he can finance a vehicle with an 8 percent, 3-year loan from a local bank, what is the maximum amount Henry can spend on the car?

Answer 1

$13,931.18

Explanation:

DP: down payment FV: future value, PV:present value, i:interest rate, n:time

1. Henry will pay 400×36=$14,400 total at the end of 3 years. So the FV will be $14,400
2. Compound interest formula is FV=PV(1+i)^n ⇒ 14,400=PV(1+0.08)^3

PV=14,400/(1.08)^3=$11,431.18

Max amount=PV+DP=11,431.18+2500=$13,931.18