Question

Mitchell has $17000 to put towards a car. He wants to invest this money in an account paying 3.3%/a

compounded monthly and use it to pay for his monthly car payments for 5 years. He is choosing between a Ford
Focus which will cost him $299 a month (no money down) and a Volkswagen Golf that will cost him $389 a month
(no money down). Which monthly payment can Mitchell afford?

Answer 1

He can afford the monthly payment of the Ford car since his accumulated interest after 5 years is greater than the amount the Ford will cost

Explanation:

For the Ford

There are 60 months in 5 years so the total amount he will be paying is 60 * 299 = $17,940

For the Volkswagen, amount to pay will be 60 * 389 = $23,340

Now to see the payment he can afford, let’s calculate the amount he will have in his savings

We shall use the formula for compound interest here

A = I(1 + r/n)^nt

where A is the amount after the

number of years

I is the initial amount = 17,000

r is the rate = 3.3% = 3.3/100 = 0.033

n is the

number of times interest is compounded per year = 12

t = number of years = 5

plugging these values we have

A = 17,000(1 + 0.033/12)^12(5)

A = 17,000( 1.00275)^60

A = $20,045

This shows he can afford the Ford