Question

After carefully going over your budget, you have determined you can afford to pay $632 per month toward a new sports car. You call up your local bank and find out that the going rate is 1 percent per month for 48 months. How much can you borrow

Answer 1

Answer:

I can borrow $24,000

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

The amount of loan can be calculated as follow

PV of annuity = P x [ ( 1- ( 1+ r )^-n ) / r ]

Amount of Loan = $632 x [ ( 1- ( 1 + 1% )^-48 ) / 1% ]

Amount of Loan = $632 x [ ( 1- ( 1.01 )^-48 ) / 0.01 ]

Amount of Loan = $24,000

r = 7.17%

Interest rate is 7.17%