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Kenneth bought a car for $16,200, but he received $900 cash back. He will make monthly payments at a 4.56% APR, compounded monthly, for 36 months. Kenneth is wondering how much money he saved by receiving the cash back. Help him figure out the answer.

Part I: How much will Kenneth have left to pay after receiving the cash back?

Part II: What is the periodic rate at which Kenneth will be charged interest?

Part III: What will Kenneth's monthly payment be?

Part IV: What would Kenneth's monthly payment have been if he hadn't received the cash back?

Part V: How much money did Kenneth save by receiving the cash back?

1 Answer

1 vote

Part I:

The amount Kenneth has left to pay after receiving the cash back is:

$16,200 - $900 = $15,300

Part II:

The periodic rate at which Kenneth will be charged interest can be found using the formula:

r = (APR/12)/100

where APR is the annual percentage rate.

r = (4.56/12)/100

r = 0.0038

So the periodic rate is 0.0038 or 0.38%.

Part III:

To find Kenneth's monthly payment, we can use the formula for the present value of an annuity:

PMT = R * (PV * r) / (1 - (1 + r)^-n)

where PMT is the monthly payment, PV is the present value, r is the periodic interest rate, and n is the number of periods.

PV = $15,300

r = 0.0038

n = 36

R is the factor by which the payments change each period, but in this case, the payments are equal, so R is equal to 1.

PMT = 1 * ($15,300 * 0.0038) / (1 - (1 + 0.0038)^-36)

PMT = $451.66 (rounded to the nearest cent)

So Kenneth's monthly payment is $451.66.

Part IV:

If Kenneth hadn't received the cash back, his present value would have been $16,200, so we can use the same formula as before to find his monthly payment:

PV = $16,200

r = 0.0038

n = 36

PMT = 1 * ($16,200 * 0.0038) / (1 - (1 + 0.0038)^-36)

PMT = $478.59 (rounded to the nearest cent)

So Kenneth's monthly payment would have been $478.59.

Part V:

To find out how much money Kenneth saved by receiving the cash back, we can subtract his monthly payment with the cash back from his monthly payment without the cash back:

$478.59 - $451.66 = $26.93 (rounded to the nearest cent)

So Kenneth saved $26.93 per month, or a total of:

$26.93 * 36 = $968.28

Therefore, Kenneth saved $968.28 by receiving the cash back.

User Kimm
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