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Please show step by step how to solve the problem in Excel with the formula and not in Excel.

1.) Kate wants to purchase a car for $505.76 monthly payments for the next 5 years. Kate qualifies for a 4.3% loan. How much does the car cost?

Answer: 27,261

Use Excel to find PV (present value) of these monthly payments.

Excel PV formula: =PV(rate,nper,pmt,fv)

Use the number of monthly payments (years *12) for the nper and the monthly interest rate (rate/12).

Please show step by step how to solve the problem in Excel with the formula and not in Excel.

Answer: 437

2.) M wants to buy a used car for $23,099. If M wants to pay it off in 5 years, how much will she have to pay each month with an annual interest rate of 5.1%? Post answer as a positive amount.

PVOA = PMT x [1 - (1 /(1 + k)n ) / k] x ( 1 + k)

or use the PMT function in Excel. =PMT(rate,nper,pv,fv)

Remember for monthly payments, the nper = years * 12 and the annual interest rate must be divided by 12.

Thank you.

User Ebru Gulec
by
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1 Answer

3 votes

Problem 1

PMT = 505.76 = monthly payment

k = monthly interest rate in decimal form

k = 0.043/12 = 0.003583333 (approximate)

n = 5*12 = 60 months

PVOA = present value of ordinary annuity

PVOA = PMT * ( 1 - (1+k)^(-n) )/k

PVOA = 505.76 * ( 1 - (1+0.003583333)^(-60) )/0.003583333

PVOA = 27,261.436358296

When rounding to the nearest dollar, we get $27,261

Your teacher made a mistake in choosing the formula. S/he mixed up present value ordinary annuity with annuity due. The (1+k) portion at the end is ignored. I rewrote the 1/( (1+k)^n ) sub-portion as (1+k)^(-n) to avoid a bit of clutter.

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To type this into excel we will write

=PV(0.043/12,5*12,505.76,0,0)

That will produce the result of -27,261.44. The negative is to indicate a cash outflow.

Don't forget about the equal sign up front when writing excel formulas.

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Problem 2

L = loan amount = 23099

k = interest rate per month = 0.051/12 = 0.00425 exactly

n = number of months = 5*12 = 60 months

PMT = monthly payment

PMT = (Lk)/(1 - (1 + k)^(-n) )

This formula is the result of solving PVOA = PMT * ( 1 - (1+k)^(-n) )/k for "PMT". The PVOA value is the loan amount in this case.

Let's plug in the values mentioned

PMT = (Lk)/(1 - (1 + k)^(-n) )

PMT = (23099*0.00425)/(1 - (1 + 0.00425)^(-60) )

PMT = 436.965684557303

PMT = 437 when rounding to the nearest whole number

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To do this in excel, we type in

=PMT(0.051/12,5*12,23099,0,0)

The output should be -436.97 which rounds to -437.

The value is negative to represent a cash outflow, but your teacher mentions to post the answer as a positive value.

User Parulb
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