Question

Someone offers to buy your car for five, equal annual payments, beginning 6 years from today. If you think that the present value of your car is $15,000.00 and the interest rate is 10%, what is the minimum annual payment that you would accept

Answer 1

The minimum annual payment that you would accept is $7,010.

Step-by-step explanation:

Using the future value formula, we have:

Future value of the car in 6 years = Present value * (100% + Interest rate)^number of years = $15,000 * (100% + 10%)^6 = $26,573.42

Using the present value of an ordinary annuity formula, we have:

Minimum annual payment = Future value of the car in 6 years / ((1 - (1 / (100% + Interest rate))^number of years to pay equal amount) / Interest rate) = $26,573.42 / ((1 - (1 / (100% + 10%))^5) / 10%) = $26,573.42 / 3.79078676940845 = $7,010

Therefore, the minimum annual payment that you would accept is $7,010.