Question

"You can afford car payments of $265 a month for three years. The interest rate is 7.5 percent, compounded monthly. How much can you afford to borrow to buy a car

Answer 1

$8519.19

Step-by-step explanation:

They used the future value discount formula of annuity

A=P(1-(1/1+r/n)^nt)/

( r/n )

Where

A=Final amount

P=initial amount

r=interest rate

n=number of times the interest will be paid

t=number of times the annuity will last

A =265(1-(1/1 + r/n)^12*3

Divide by

(0.075/12)

Equals

A=265*32.1479

A=$8519.19

Answer 2

Given Information:

Monthly payment = $265

Interest rate = 7.5 %

time period = 3 years

Required Information:

Annual Present Value = ?

Answer:

Annual Present Value = $8,519

Step-by-step explanation:

Monthly interest rate = 7.5/12 = 0.625 %

n = 12*3 = 36

Annual Present Value = $265 (1 - [1/(1+0.00625)³⁶]/0.00625)

Annual Present Value = $265 (32.147)

Annual Present Value = $8518.95 ≅ $8519

Therefore, you can afford to borrow $8,519 to buy a car.