Final answer:
To find Mr. Jones's monthly car payment for a $25,000 loan at 6% annual interest rate over 5 years, we use the amortisation loan formula. By converting the annual rate to a monthly rate and using a loan term of 60 months in the formula, we calculate the monthly payment he needs to make.
Step-by-step explanation:
Mr. Jones is interested in financing a used car for $25,000 with a credit agreement of 6% annual interest over a 5 year period. To calculate the monthly payment Mr. Jones would be expected to pay, we use the formula for an amortizing loan which considers the principal amount, the annual interest rate converted to a monthly rate, and the number of payments over the term of the loan.
To apply this formula, the annual interest rate of 6% is divided by 12 to get the monthly interest rate, which is then 0.5%. This rate is expressed as a decimal for calculations by dividing it by 100, resulting in 0.005. With a loan term of 60 months (5 years x 12 months), we can use the formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ] where M is the monthly payment, P is the principal amount of $25,000, i is the monthly interest rate of 0.005, and n is the total number of payments, which is 60.
Plugging these values into the formula will provide us with the monthly payment amount Mr. Jones has to pay, effectively allowing him to budget for his new vehicle purchase while considering his excellent credit rating.